MANAGEMENT OF WORKING CAPITAL
The success of any business largely depends on availability and effective management of working capital. Adequate amount of working capital is inevitable for the success of a business and therefore, it is regard as the life-blood of business.
Meaning and Definition
Working Capital Management refers to all aspects of managing current assets and current liabilities. It studies the problems that arise in management of current assets and current liabilities and the inter relations that exist between them. It involves management of different components of working capital such as cash, receivables, and inventories.
Working capital management is defined as, "the managerial strategy designed to monitor and utilize the components of working capital, to ensure the most financially efficient operation of the company".
Dimensions of Working Capital Management
Efficient management of working capital should cover different aspects of working capital. The following are the important dimensions of working capital management:
a. Managing investment in current assets: It involves the determination of appropriate level of investment in current assets.
b. Financing of working capital or managing current liabilities: It involves deciding the appropriate mix of various sources of working capital.
c.Inter relations among various components: Current assets and current liabilities are interlinked. Working capital management should cover the study of its inter relationship.
d.Volality and reversibility: The funds invested in current assets can change rapidly Hence, financial requirements also require a corresponding change. It is called the voltality of working capital. Another aspect related to voltality is reversibility. It means that cash flow related to current assets and current liabilities can be readily reversed.
Need and Significance of Working Capital Management
Proper management of working capital is essential to a company's fundamental financial health and operational success. A hallmark of good business management is the ability to utilise working capital to maintain a solid balance between growth, profitability and liquidity.
If production, sales and collection of cash are instantaneous, there is no need for maintaining working capital. However, there is time gap between investment in business and production, production and sales, and sales and collection of cash. This time gap is technically known as operating cycle.
In case adequate working capital is not available in the various stages of production,marketing, sales and collection of debts, the firm will not be in a position to function properly.
Working capital management involves Cash Management, Receivables Management
(Debtors Management) and Inventory Management.
Working Capital - Meaning and Definitions
Working capital refers to that part of capital which is required for meeting or financing short term or current assets of the business such as cash, inventories, debtors and marketable securities. The funds invested in current assets are revolving fast and are converted from one form to another, such as cash to inventory, inventory to debtors, debtors to receivables and receivables into cash. Hence, working capital is also known as circulating capital or revolving capital.
In the words of Shubin "Working capital is the amount of funds necessary to cover the cost of operating an enterprise".
In the words of Genestenberg Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as from cash to inventories, inventories to receivables, receivables into cash".
Importance / Advantages of Adequate Working Capital
A sound working capital management policy should ensure that working capital should be adequate and at the same time it should not be excessive. There should be adequate working capital for the smooth functioning of an organisation. The need for working capital are explained as follows:
1.Smooth running: A concern require adequate working capital to carry on its day to day operations smoothly and efficiently.
2. Prompt payment: It enables a firm to pay its current obligations promptly and take advantage of cash discounts.
3. Maintains reputation/goodwill: It ensures the maintenance of a company's credit standing and reputation.
4. Maintains inventory at the optimum level: It enables maintaining inventory at the optimum level to serve the needs of customers.
5. Extends favourable credit terms: It enables a company to extend favourable credit terms to its customers.
6. Easy loan: Adequate amount of working capital builds a sound credit worthiness of the firm. As a result, it becomes easier for the firm to obtain additional loans in favourable terms.
7. Efficient operation of the business: It enables a company to operate its busin more efficiently because there is no delay in obtaining materials, payment wages, etc.
8. Provides adequate fund: It provides a firm with adequate funds for meeti unforeseen contingencies in the future.
9. Increase in liquidity and solvency position: Adequate working capital enhances the liquidity and solvency position of the business concern,
10. Efficient utilisation of resources: It helps to utilise the maximum available resource 11. Stable dividend policy: It helps a firm to follow a stable dividend policy due to the timely availability of working capital.