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Working capital is how much in liquid assets that a company has on hand. Working capital is
needed to pay for planned and unexpected expenses, meet the short-term obligations of the
business, and to build the business.A lack of working capital makes it hard to attract investors
or to get business loans or obtain credit.
(Definition of Working Capital By Lahe wolfr , About.com Guide)
What Is Working Capital?
Working capita refers to the cash a business requires for day-to-day operations, or, more specifically,
for financing the conversion of raw materials into finished goods, which the company sells for
payment. Among the most important items of working capital are levels of inventory, accounts
receivable and accounts payable. Analysts look at these items for signs of a company's efficiency and
financial strength.
What Is Working Capital management?
Working capital management is a key factor in an organisation’s long term success. A business must
therefore have clear policies for the management of each component of working capital. The
management of cash, marketable securities receivable, accounts payable, accruals and other means
of short term financing is the direct responsibility of the financial manager and itrequrires continuous
day to day supervision. (acca f9, bp publication)
Take a simplistic case: a spaghetti sauce company uses $100 to build up its inventory of tomatoes,
onions, garlic, spices etc. A week later, the company assembles the ingredients into sauce and ships
it out. A week after that, the checks arrive from customers. That $100, which has been tied up for two
weeks, is the company's working capital. The quicker the company sells the spaghetti sauce,
the sooner the company can go out and buy new ingredients, which will be made into more sauce
sold at a profit. If the ingredients sit in inventory for a month, company cash is tied-up and can't be
used to grow the spaghetti business. Even worse, the company can be left strapped for cash when it
needs to pay its bills and make investments. Working capital also gets trapped when customers do
not pay their invoices on time or suppliers get paid too quickly or not fast enough.
The better a company manages its working capital, the less the company needs to borrow. Even
companies with cash surpluses need to manage working capital to ensure that those surpluses are
invested in ways that will generate suitable returns for investors.
A simplistic, but accurate, comparison of two companies' current positions will illustrate the weakness
in relying on the current ratio and a working capital number as liquidity indicators:
However, what if both companies' current liabilities have an average payment period of 30 days;
company ABC needs six months (180 days) to collect its account receivables, and its inventory turns
over just once a year (365 days). Company XYZ's customers pay in cash,and its inventory turns over
24 times a year (every 15 days). In this contrived example, company ABC is very illiquid and would
not be able to operate under the conditions described. Its bills are coming due faster than its
generation of cash. You can't pay bills with working capital; you pay bills with cash! Company XYZ’s
seemingly tight current position is much more liquid because of its quicker cash conversion.
http://www.investopedia.com/articles/basics/06/workingcapital.asp
SOLUTION
20X8 20X7
(2,065.0/572.3-501.0)=28.96 (1,788.7/523.2-420.3)=17.38
(a) The company is a manufacturing group serving the construction industry, and so would be
Expected to have a comparatively lengthy accounts recivable turnover period ,because of
the relatively poor cash flow in the construction industry .
(b) The company compensates for this by ensuring that they do not pay for raw materials and
Other costs before they have sold their inventories of finished goods(hence the similarity of
accounts receivable and accounts payable turnover period.
(c) The company ,s current and quick ratios have fallen but are still reasonable ,and the quick
ratio is not much less than the current ratio. The suggests that inventory levels are strictly
controlled ,which is reinforced by the low inventory trunover period.
(d) The ratio of sales revenue/net working capital indicates that working capital has not
increased in line with sales .The may forecast future liquidity problems.
It would seen that working capital is tightly manged, to avoid the poor liquidity which could
be caused by a high accounts recivable turnover period and comparatively high accounts
payable .however ,turnover has increased but net working capital has declined due in part to
the fall in short term investments and the increase in loans and overdrafts.
Ans 4...............
which is discuss below,
a) Long term fund.
Capital extended for a term of greater than a year. In both investing and personal
finance, long-term financing often takes the form of a loan with a payback
period of longer than one year. Examples of long-term financing include a 30
year mortgage or a 10-year Treasury note. Equity is another form of long-term
financing, such as when a company issues stock to raise capital for a new
project. Internet (the free dictionary or no 5)
In the long term option a company get the long term bank loan which now
becomes unavailable because of current credit crunch. More over as the central
bank become imposing more collateral rules regarding bank loan the loan
become inaccessible.
Short-term financial plans involve less uncertainty than long-term financial plans
because, generally speaking, market trends are more easily predictable in the
short term. Likewise, short-term financial plans are more easily amendable as a
result of the short time frame. Short-term financial plans usually invest in short-
lived securities. A short-term financial plan aims to achieve goals that would be
beneficial for one's long-term financial plan. Internet (the free dictionary or no
6)
However in short term option a company gets many alternative chance to get
instant liquidity. A company can take the following initiative.
1. New issues of share.
2. Credit trade
3. Bonds
7. Security of debenture.
The company can take these steps for solved financial problem.
The company can issue new share for collect money from the share market.
When the old shares become matured, the share holder must get deviant
back from the company. For this time, company giving bonuses share as a
substitute of offer dividend and Company can use the dividend.
The company can also take short time lone from the bank for the solved the
problem.
Or the company can do issue security debenture for collect the money form
the share market.
Company issue a new rule which is that director’s body must increase their
share. In this away the company can solve the problem.
Or, the company can take steps which is that, the existing share holder to buy
more shares. In this ways the company can arise the fund form the share
market. On the other hand the company can take special borrowing from the
bank.
1. http://financial-dictionary.thefreedictionary.com/Long-term+financing
2. http://financialdictionary.thefreedictionary.com/Investmet.
Ans 5
Stakeholder concerns
Ans ; stakeholders are individuals or groups who are affected by the activities of the firm.
They can be classified as internal (employ and managers), connected (shareholder, customer,
and suppliers) and external (local communities, pressure groups, government.)