In estimating working capital needs, different people adopt different approaches. Some experts suggest that the working capital should be greater than the minimum requirements of the firm. The management should feel safety. It would be able to meet its obligations even in adverse circumstances. However, the excessive capital may lead to waste and inefficiency. On the other hand, some experts suggest that the working capital should be lower than the requirement so that no idle funds shall be invested in the current assets and it ultimately leads to increase in profitability of the company. However, in such case the firm always have risk of technical insolvency as it may not meet its obligations as and when they falls due for Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Determinants of Working Capital
There are no set rules or formulate to determine the working capital requirements of a firm. The corporate management has to consider the various factors in making decisions regarding working capital balances. An appraisal of these would provide guidance to management in estimating prospective needs. These are called as determinants of working capital. The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment. In this section let us examine the various  determinants of working capital. Nature of Business is one of the factors. Usually in trading businesses the Continue reading
Principles of Working Capital Management
Working capital management is concerned with the problem that arises in attempting to manage the current assets, the current liabilities and the inter-relationship that exist between them. The goal of working capital management is to manage a firm’s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. The financial manager must keep in mind the following principles of working capital management: Principle of Optimization:The level of working capital must be so kept that the rate of return on investment is optimized. In other words, the working capital should be maintained at an optimum level. This is the point at which the increase in cost due to decline in working capital is Continue reading
Approaches to Working Capital Financing
Having dealt with the size of investment in current assets, the methods of financing of working capital needs our attention. Working capital is financed both internally and externally through long-term and short-term funds, through debt and ownership funds. In financing working capital, the maturity pattern of sources of finance depended much coincide with credit period of sales for better liquidity. Generally, it is believed that funds for acquiring the fixed assets should be raised from long term sources and short-term sources should be utilized for raising working capital. But in the recent modern enterprises, both the types of sources are utilized for financing both fixed and current assets. There are basically three approaches to financing working capital. These are: the Continue reading
Working Capital Investment
Investment in working capital involves determination of the total quantum of current assets, the size of individual items of current assets and the operating cycle. These may be planned, adopting any of the following approaches, viz. industry norm approach, economic mode approach and strategic choice approach. Under the Industry norm approach the size and composition of current assets are determined according to the convention or norms adopted by die firms in the industry. For instance, 2 months production requirements of raw materials, 1 months production needs of work-in-process, 3 months sales of finished stock, 2 months credit to customers, etc. may be norms and you follow the norms. When this approach is adopted, automatically total volume arid component size of Continue reading
Capital Sources for Business: Debentures
A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is an acknowledgement of the company’s indebtedness to its debenture-holders. Debentures are financial instruments for raising long term debt capital. Debenture holders are the creditors of the company. In India, according to the Companies Act, 1956, the term debenture includes “debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.” Debenture-holders are entitled to periodical payment of interest at an agreed rate. They are also entitled to redemption of their capital as per the agreed terms. No Continue reading