Working Capital Management

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:

  1. 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.
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Abey Francis

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.… Read the rest

Abey Francis

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.

  1. 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.
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Abey Francis

Optimum Level of Working Capital

A firm has to maintain an adequate level of working capital to run its operations smoothly and effectively. It should be adequate in the sense that it shall not be more than the requirements nor it shall be less than the requirements. Both the excessive as well as inadequate working capital positions are dangerous from the firm’s point view.

We know that the current liabilities are met out of the current assets. So the level of current assets shall be sufficient enough to meet the current liabilities. Excessive working capital refers to the position where when the level of current assets is much higher to meet current liabilities.… Read the rest

Abey Francis

Working Capital Concepts

Working Capital, being lifeblood for any enterprise, its management becomes a crucial exercise for the Financial Manager of a firm. The need of working capital is directly linked to the growth of the firm. Working Capital refers to the funds invested in the current assets of a firm such as raw materials, work-in-progress, finished goods, receivables, cash etc.   From the viewpoint of manufacturing process, working capital means that part of capital, which is required to keep the flow of production smooth and continuous.

For day-to-day operations, a business needs to carry certain amount of raw material of all sorts so that commencement of production is not delayed, certain amount of work-in-process so that production operations go smoothly, certain amount of finished goods so that supply to market is not hampered by fluctuations in production, certain amount of book debts so that sales take place continuously and certain amount of cash and bank balance for meeting daily routine payments and for providing for any unforeseen contingencies.… Read the rest

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Abey Francis