Working capital management is concerned with making sure we have
exactly the right amount of money and lines of credit available to the business
at all times. Working capital management involves the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working
capital management is to ensure that a firm is able to continue its operations
and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses.
The management of working capital involves
managing inventories, accounts receivable and payable, and cash. Working
Capital is the money used to make goods and attract sales. The less Working
Capital used to attract sales, the higher is likely to be the return on
investment. Working Capital management is about the commercial and financial
aspects of Inventory, credit, purchasing, marketing, and royalty and investment
policy. The higher the profit margin, the lower is likely to be the level of
Working Capital tied up in creating and selling titles the term working capital
refers to the amount of capital which is readily available to an organization.
That is, working capital is the difference between resources in cash or readily
convertible into cash (Current Assets) and organizational commitments for which
cash will soon be required (Current Liabilities). Current Assets are resources
which are in cash or will soon be converted into cash in "the ordinary
course of business".
Current Liabilities are commitments which will soon require cash
settlement in "the ordinary course of business".
Thus:
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
In a department's Statement of Financial Position, these
components of working capital are reported under the following headings:
Current Assets• Liquid Assets (cash and bank deposits)• Inventory• Debtors and Receivables• Loans & advances• Finished goods• Raw material and componentCurrent Liabilities• Bank Overdraft• Creditors and Payables• Other Short Term Liabilities• Trade advances
Sundry creditors Working capital constitutes part of the Crown's
investment in a department. Associated with this is an opportunity cost to the
Crown. (Money invested in one area may "cost" opportunities for
investment in other areas.) If a department is operating with more working
capital than is necessary, this over-investment represents an unnecessary cost
to the Crown. From a department's point of view, excess working capital means
operating inefficiencies.
The objective of working capital management is to maintain the
optimum balance of each of the working capital components. This includes making
sure that funds are held as cash in bank deposits for as long as and in the
largest amounts possible, thereby maximizing the interest earned. However, such
cash may more appropriately be "invested" in other assets or in
reducing other liabilities.
Working capital management takes place on two levels:
§ Ratio analysis can be used to monitor overall trends in working
capital and to identify areas requiring closer management (see Chapter Three).
§ The individual components of working capital can be effectively
managed by using various techniques and strategies (see Chapter Four). When
considering these techniques and strategies, departments need to recognize that
each department has a unique mix of working capital components.
The emphasis that needs to be placed on each component varies
according to department. For example, some departments have significant
inventory levels; others have little if any inventory. Further more, working
capital management is not an end in itself. It is an integral part of the
department's overall management. The needs of efficient working capital
management must be considered in relation to other aspects of the department's
financial and non-financial performance.
FACTORES INFLUENCING
THE REQUIREMENT OF WORKING CAPITAL
a)
Daily
requirement of cash
b)
Minimum
requirement of raw material for smooth production activities
c)
The number of
day’s requirement to convert raw material into finished product.
d)
The number of
day’s credit given to customers
CREDIT POLICY
The credit policy of a company is very important for the business
prospects and hence a decision on this should be taken after considering
various factors like:
a)
Government
guidelines
b)
Nature of
product
c)
Competition
d)
Customer
background
e)
Financial
position of the company
Credit policy is the actions taken by a business to grant, monitor
and collect the cash for outstanding accounts receivable. Now I m going to
explain the credit policy considering od ‘X’ ltd. FOLLOWING three credit
policies were under consideration of Xltd. We have to find out which of the
policies would be beneficial to the company considering the net profit for the
year concerned
From the above working, we can come to
conclusion that credit policy ‘c’ would give more profit hence to be ranked as
I, credit policy as ‘B’ AS II and credit policy ‘A’ AS III
