INTRODUCTION

Working capital management refers to the administration of all aspects of current assets,
namely cash, marketable securities, debtors and stock (inventories) and current liabilities. The
financial manager must determine levels and composition of current assets. He must see that
right sources are tapped to finance current assets, and that current liabilities are paid in time.
He must see that right sources are tapped to finance current assets, and that current liabilities
are paid in time.
There are many aspects of working capital management, which make it an important function
of the financial manager:
Time: working capital management requires much of the financial managers time.
Investment: working capital represents a large portion of the total investments in
assets.
Significance: working capital management has great significance for all firms but it is
very critical for small firms.
Growth: The need for working capital is directly related to the firms growth.

Investment in current assets represents a very significant portion of the total investment in
assets. Working capital management is critical for all firms. A small firm may not have much
investment in fixed assets, but it has to invest to in current assets. Small firms in India face a
severe problem of collecting their debtors.
Banks have their own policies to assess the working capital of the firm to finance them with
the shortage.
J&K Bank adopts certain method for financing their customers working capital
requirements. There are certain recommendations from the committees for the banks to
finance the working capital needs of their clients.
It may, thus, be concluded that all precautions should be taken for the effective and efficient
management of working capital. The finance manager should pay regular attention to the
levels of current assets and the financing of current assets.


Working capital management is a significant fact of financial management due to the fact that
it plays a pivotal role in keeping wheels of business enterprise running. Shortage of funds for
working capital has caused many businesses to fail and in many cases, has recorded poor
growth. Lack of efficient and effective utilization of working capital leads to earn low rate of
return on capital employed or even compels to sustain losses. Working capital is the flow of
ready funds necessary working of the enterprise. It consists of funds invested in current assets
or those assets which in the ordinary course of business can be turned into cash within a brief
period without undergoing diminution in value and without disruption of the organization.
Financial analysis is the process of identifying the financial strengths and weaknesses of the
firm by properly establishing relationships between the items of the balance sheet and the
profit and loss account. It refers to an assessment of the viability, stability and profitability of
a business, sub-business or project. The future plans of the firm should be laid down in view
of the firms financial strengths and weaknesses. Thus, financial analysis is the starting point
for making plans, before using any sophisticated forecasting and planning procedures.
Understanding the past is a prerequisite for anticipating the future.











WORKING CAPITAL MANAGEMENT

Working capital 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. Its a measure of both a company's efficiency and its short-term
financial health. It is a financial metric which represents operating liquidity available to a
business, organization, or other entity, including governmental entity. Along with fixed assets
such as plant and equipment, working capital is considered a part of operating capital. It is a
derivation of working capital that is commonly used in valuation techniques such as DCFs
(Discounted cash flows). If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit.
Net Working Capital = Current Assets Current Liabilities
Through this formula, a working capital amount can be determined to be either positive or
negative. Naturally, this will rely largely on the amount of debt owed by the company. A
positive change in a companys working capital will generally indicate one of two
developments. Either the company has increased its current assets by receiving cash (or some
other form of assets), or it has minimized its liabilities often by paying off a short-term
creditor.
On the other hand, companies that are operating with negative working capital may not have
the financial support or flexibility to grow and/or improve, even when such developments
would be indicated. Hence, working capital can be an indicator of the overall strength of a
company.
There are three main indicators used in calculating working capital. Elements of the current
assets side of the equation will include accounts receivable, as well as any inventory of
goods on-hand. Current liabilities will include accounts payable.
If a company's current assets do not exceed its current liabilities, then it may run into trouble
paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining
working capital ratio over a longer time period could also be a red flag that warrants further
analysis. For example, it could be that the company's sales volumes are decreasing and, as a
result, its accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the company's underlying operational
efficiency. Money that is tied up in inventory or money that customers still owe to the
company cannot be used to pay off any of the company's obligations. 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.

















COMPONENTS OF THE WORKING CAPITAL

The various components as given in the Performa above are now discussed in detail as:

1. Raw Material Requirements:

Every business unit would like to have some minimum stock of the raw material in hands so
that production goes on smoothly and it is not generally feasible to make purchase on daily
basis. As bankers, we have to find out how many a days consumption of raw material shall
be required by the borrower unit. The storage period differ from industry to industry but the
factors like nature of material, price level, storage facilities, availability of the material,
sources of raw material, time involved etc. broadly affect the level of holding.

In case of an existing unit, the following formula shall reveal the storage period of raw
materials:
Average Stock of Raw Materials (i.e., Opening Stock + Closing Stock/2)
Average daily consumption of raw materials (i.e., opening Stock + Raw Material
Consumption during the year Closing Stock/number of days in the year)

2. Stores and Spares requirements:

In case of existing units, the storage period can be judged in the same way as
above i.e.,

Average Stocks of Stores/Spares (i.e., Opening Stock + Closing Stock/2)
Average daily consumption of Stores/Spares (i.e., Opening Stock + Purchases during
the year-Closing Stock/number of days in the year)





.
3. Stock/ Work in progress.

In case of existing units, the storage/ holdings period can be judged in the same ways in
above 1 and 2 by employing the following formula:

Average work in progress [Opening Stock in process+ Closing Stock in Process/21
Daily cost of finished goods during the year.

[Opening Stock in Process+ Purchases of raw material- Closing Stock in process/
number of days in the year or Cost of Production/ Number of days in the year]

4. Finished Goods:

Generally, some stock of finished goods remained with the unit as it is difficult to sell all
finished goods on the very next day of production. In fact, a very high storage of finished
goods is not a healthy feature as it indicates a poor stability unless otherwise explained by the
borrower client. Further factors like nature of markets, availability of infra structure, types of
order etc have a great bearing on stock holding of finished goods.

In case of existing units, the formula for computation of holding of finished goods is:

Average Stock of Finished Goods (Opening Stock + Closing Stock/2
Cost of Production or Sales Gross profit / number of days in the year

5. Bills Receivables / Debtors:

In this case of existing units, the formula for determining the average credit period allowed
shall be as:

Average (Debtors + Receivables) i.e., Opening Stock + Closing Stock/2
Average credit sales / number of days in the year

In case no separate figures are available for credit sales, consider entire sales figure for the
calculations.
6. One months manufacturing / administrative expenses:

As a matter of policy and cushion, the bankers usually add one months operative expenses to
the working capital requirements of the borrower clients.
If we add the amounts derived above, we get the gross working requirements of the client.
We have to deduct the following to arrive at net working capital requirements:

1. Credit available on purchase:
To the extent credit is available to the business unit, the requirements for working capital will
come down to that extent.
In case of existing units, the period of credit enjoyed can be calculated as:
Average (Creditors + Bills Payable) i.e., Opening Stock + Closing Stock/2
Average daily credit purchases i.e., (Opening Stock + purchases during the year Closing
Stock / number of days in the year)

2. Advance:
If received, also reduces the working capital requirements of the borrower unit.
After deducting these two from the gross working capital, we proceed to get the NWC
requirements of the unit and the extent to which a Bank shall finance this NWC is called
permissible finance. This depends on many factors like security available, standing of the unit
and of course, on the credit policy of the bank. Generally, bankers insist on 25% margin
requirements but may proceed to accept less or more margin as per the circumstances of the
case.
As we might have observed the above calculation is for existing units only a few units would
not be having any past financial data or statements and the banker cannot compare the
projections with the past performance of the unit. This makes financial analysis more
complicated and may not prove very clear and precise. The only way available to bankers in
this respect is to make an inter-firm or industry comparisons.




TYPES OF WORKING CAPITAL

Working capital can be categorized into following types:
Gross Working Capital: It is used for all the current assets. Total value of current assets will
equal to gross working capital. In simple words, it is total cash and cash equivalent on hand
also, we do not account of current liabilities in gross working capital.
Net Working Capital: Net working capital is the excess of current assets over current
liabilities.
Net Working Capital = Total Current Assets Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets, then
balance amount can be used for repayment of long term debts at any time. Its also a measure
of both a company's efficiency and its short-term financial health.
Permanent Working Capital: It is that amount of capital which must be in cash or current
assets for continuing the activities of business. It also shows the minimum amount of all
current assets that is required at all times to ensure a minimum level of uninterrupted business
operations. This is the reason why current ratio has to be substantially more than 1.
Temporary Working Capital: Sometime, it may be possible that we have to pay fixed
liabilities, at that time we need working capital which is more than permanent working
capital, and then this excess amount will be temporary working capital. It represents the
additional current assets required at different times during the operating year.





FACTORS INFLUENCING WORKING CAPITAL
REQUIREMENTS

All firms do not have the same working capital needs. The following are the factors that
affect the WC needs:
1) Nature and size of business: The WC requirement of a firm is closely related to the
nature of the business. We can say that trading and financial firms have very less
investment in fixed assets but require a large sum of money to be invested in WC. On
the other hand Retail stores, for example, have to carry large stock of variety of goods
hence large investments in the fixed assets. Also a firm with a large scale of
operations will obviously require more WC than the smaller firm.

2) Manufacturing cycle: It starts with the purchase and use of raw materials and
completes with the production of finished goods. Longer the manufacturing cycle
larger will be the WC requirement; this is seen mostly in the industrial products.


3) Business fluctuation: When there is an upward swing in the economy, sales will
increase also the firms investment in inventories and book debts will also increase,
thus it will increase the WC requirement of the firm and vice-versa.

4) Production policy: To maintain an efficient level of production the firms may resort
to normal production even during the slack season. This will lead to excess production
and hence the funds will be blocked in form of inventories for a long time, hence
provisions should be made accordingly. Since the cost and risk of maintaining a
constant production is high during the slack season some firms may resort to
producing various products to solve their capital problems. If they do not, then they
require high WC.


5) Firms Credit Policy: If the firm has a liberal credit policy its funds will remain
blocked for a long time in form of debtors and vice-versa. Normally industrial goods
manufacturing will have a liberal credit policy, whereas dealers of consumer goods
will a tight credit policy.

6) Availability of Credit: If the firm gets credit on liberal terms it will require less WC
since it can always pay its creditors later and vice-versa.


7) Growth and Expansion Activities: It is difficult precisely to determine the
relationship between volume of sales and need for WC. The need for WC does not
follow the growth but precedes it. Hence, if the firm is planning to increase its
business activities, it needs to plan its WC requirements during the growth period.

8) Conditions of Supply of Raw Material: If the supply of RM is scarce the firm may
need to stock it in advance and hence need more WC and vice-versa.


9) Profit Margin and Profit Appropriation: A high net profit margin contributes
towards the WC pool. Also, tax liability is unavoidable and hence provision for its
payment must be made in the WC plan, otherwise it may impose a strain on the WC.

Also if the firms policy is to retain the profits it will increase their WC, and if they
decide to pay their dividends it will weaken their WC position, as the cash will flow
out. However this can be avoided by declaring bonus shares out of past profits. This
will help the firm to maintain a good image and also not part with the money
immediately, thus not affecting the WC position.




WORKING CAPITAL CYCLE
The working capital cycle can be defined as:
The period of time which elapses between the point at which cash begins to be expended
on the production of a product and the collection of cash from a customer.
Cash flows in a cycle into, around and out of a business. It is the business's life blood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire
The faster a business expands the more cash it will need for working capital and investment.
The cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.
There are two elements in the business cycle that absorb cash - Inventory (stocks and work-
in-progress) and Receivables (debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.


The working capital cycle is a diagram rather than a mathematical calculation. The cycle
shows all the cash coming in to the business, what it is used for, and how it leaves the
business (i.e., what it is spent on).

IMPORTANCE:
A good working capital cycle balances incoming and outgoing payments to maximize
working capital. Simply put, you need to know you can afford to research, produce, and sell
your product.
A short WC cycle suggests a business has good cash flow. For example, a company that pays
contractors in 7 days but takes 30 days to collect payments has 23 days of working capital to
fundalso known as having a working capital cycle of 23 days. For a business to grow, it
needs access to cashand being able to free up cash from the working capital cycle is
cheaper than other sources of finance, such as loans.














WORKING CAPITAL FINANCING

Working capital financing comes in many forms, each of which has unique terms and offers
certain advantages and disadvantages to the borrower. These are as following:

Line of Credit
Accounts Receivable Financing
Factoring
Inventory Financing
Term Loan

A) Line of Credit

A line of credit is an open-ended loan with a borrowing limit that the business can draw
against or repay at any time during the loan period. This arrangement allows a company
flexibility to borrow funds when the need arises for the exact amount required. Interest is paid
only on the amount borrowed, typically on a monthly basis. A line of credit can be either
unsecured, if no specific collateral is pledged for repayment, or secured by specific assets
such as accounts receivable or inventory. The standard term for a line of credit is 1 year with
renewal subject to the lenders annual review and approval. Since a line of credit is designed
to address cyclical working capital needs and not to finance long-term assets, lenders usually
require full repayment of the line of credit during the annual loan period and prior to its
renewal. This repayment is sometimes referred to as the annual cleanup.

The advantages of a line of credit are twofold. First, it allows a company to minimize the
principal borrowed and the resulting interest payments. Second, it is simpler to establish and
entails fewer transaction and legal costs, particularly when it is unsecured. The disadvantages
of a line of credit include the potential for higher borrowing costs when a large compensating
balance is required and its limitation to financing cyclical working capital needs. With full
repayment required each year and annual extensions subject to lender approval, a line of
credit cannot finance medium-term or long-term working capital investments.


B) Term Loan

Term loans are used to finance medium-term noncyclical working capital. A term loan is a
form of medium-term debt in which principal is repaid over several years, typically in 3 to 7
years. Since lenders prefer not to bear interest rate risk, term loans usually have a floating
interest rate. Sometimes, a bank will agree to an interest rate cap or fixed rate loan, but it
usually charges a fee or higher interest rate for these features.

Term loans have a fixed repayment schedule that can take several forms. In this case, the
company pays the same principal amount each month plus interest on the outstanding loan
balance. A second option is a level loan payment in which the total payment amount is the
same every month but the share allocated to interest and principle varies with each payment.
Term loans can be either unsecured or secured; a business with a strong balance sheet and a
good profit and cash flow history might obtain an unsecured term loan, but many small firms
will be required to pledge assets. Moreover, since loan repayment extends over several years,
lenders include financial covenants in their loan agreements to guard against deterioration in
the firms financial position over the loan term. Typical financial covenants include minimum
net worth, minimum net working capital (or current ratio), and maximum debt-to-equity
ratios. Finally, lenders often require the borrower to maintain a compensating balance
account equal to 10% to 20% of the loan amount.

The major advantage of term loans is their ability to fund long-term working capital needs.
Term loans provide the medium-term financing to invest in the cash, accounts receivable, and
inventory balances needed to create excess working capital. They also are well suited to
finance the expanded working capital needed for sales growth. Furthermore, a term loan is
repaid over several years, which reduces the cash flow needed to service the debt. However,
the benefits of longer term financing do not come without costs, most notably higher interest
rates and less financial flexibility. Since a longer repayment period poses more risk to
lenders, term loans carry a higher interest rate than short-term loans. When provided with a
floating interest rate, term loans expose firms to greater interest rate risk since the chances of
a spike in interest rates increase for a longer repayment period.


C) SUPPLIERS CREDIT

At times, business gets raw material on credit from the suppliers. The cost of raw material is
paid after some time, i.e. upon completion of the credit period. Thus, without having an
outflow of cash the business is in a position to use raw material and continue the activities.
The credit given by the suppliers of raw materials is for a short period and is considered
current liabilities. These
funds should be used for creating current assets like stock of raw material, work in process,
finished goods, etc.

D) BANK LOAN FOR WORKING CAPITAL
This is a major source for raising short-term funds. Banks extend loans to businesses to help
them create necessary current assets so as to achieve the required business level. The loans
are available for creating the following current assets:

Stock of Raw Materials
Stock of Work in Process
Stock of Finished Goods
Debtors

Banks give short-term loans against these assets, keeping some security margin. The
advances given by banks against current assets are short-term in nature and banks have the
right to ask for immediate repayment if they consider doing so. Thus bank loans for creation
of current assets are also current liabilities.









Key Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital utilization.
Ratio Formulae Result Interpretation
Stock
Turnover
(in days)
Average
Stock * 365/
Cost of
Goods Sold
= x
days
On average, you turn over the value of your entire
stock every x days. You may need to break this
down into product groups for effective stock
management.
Obsolete stock, slow moving lines will extend
overall stock turnover days. Faster production,
fewer product lines, just in time ordering will
reduce average days.
Receivables
Ratio
(in days)
Debtors *
365/
Sales
= x
days
It take you on average x days to collect monies due
to you. If your official credit terms are 45 day and
it takes you 65 days... why ?
One or more large or slow debts can drag out the
average days. Effective debtor management will
minimize the days.
Payables
Ratio
(in days)
Creditors *
365/
Cost of
Sales (or
Purchases)
= x
days
On average, you pay your suppliers every x days. If
you negotiate better credit terms this will increase.
If you pay earlier, say, to get a discount this will
decline. If you simply defer paying your suppliers
(without agreement) this will also increase - but
your reputation, the quality of service and any
flexibility provided by your suppliers may suffer.
Current Ratio Total
Current
Assets/
Total
Current
Liabilities
= x
times
Current Assets are assets that you can readily turn
in to cash or will do so within 12 months in the
course of business. Current Liabilities are amount
you are due to pay within the coming 12 months.
For example, 1.5 times means that you should be
able to lay your hands on $1.50 for every $1.00 you
owe. Less than 1 times e.g. 0.75 means that you
could have liquidity problems and be under
pressure to generate sufficient cash to meet
oncoming demands.
Quick Ratio (Total
Current
Assets -
Inventory)/
Total
Current
Liabilities
= x
times
Similar to the Current Ratio but takes account of
the fact that it may take time to convert inventory
into cash.
Working
Capital Ratio
(Inventory +
Receivables
- Payables)/
Sales
As %
Sales
A high percentage means that working capital
needs are high relative to your sales.
















TIME LAG IN WORKING CAPITAL

Time lag refers to period of time between two events which is a delay between two events.
The Working Capital Cycle shows the various intervals between payments and receipts.
Throughout the production process the business must manage its working capital in order to
ensure that business operations can continue smoothly.
Businesses usually collect and make payments at different periods of time. In the very
beginning of the production process credit is generally extended by suppliers to the business
for raw materials. This credit facility usually runs from 30days to 90days. In other words,
through an extension of credit a business will not be obligated to immediately meet the
payment for goods collected until this time elapses.
By the same measure, when goods are sold to customers in the final phase of the production
process, the business may in turn extend its own credit facility to its clients. Even during the
production process itself, when partially finished goods and final goods are created time lags
are created and need to be managed in order to ensure a healthy working capital cycle.
It is simply a question of whether enough payments or receipts for goods produced and sold
are enough to meet the costs or payments associated with productivity. These time lags may
occur due to work-in-progress or even when the finished goods are completed pending sales.
In this respect businesses seek to reduce the production cycle through lean production
techniques or Just-In-Time production techniques. Managing the working capital cycle
directly impacts the businesses ability to control costs, since these will affect liquidity and
profitability.
The operating cycle for a company primarily begins with the purchase of raw
materials, which are paid for after a delay representing the creditor's payable period.
These purchased raw materials are then converted by the production unit into finished
goods and then sold. The time lag between the purchase of raw materials and the sale
of finished goods is known as the inventory period.
Upon sale of finished goods on credit terms, there exists a time lag between the sale
of finished goods and the collection of cash on sale. This period is known as the
accounts receivables period.
The time lag between the purchase of raw materials and the collection of cash for
sales is referred to as the operating cycle for the company.
The time lag between the payment for raw materials purchases and the collection of
cash from sales is referred to as the cash cycle.
How to reduce time lag and blockage in working capital:
By adopting a few working capital management strategies, you can make your assets
work for you, without becoming beholden to banks.
Shorten Your Operating Cycle:
Your operating cycle starts when you take cash out of your account to begin work for a client,
and ends the day the client pays you. If you complete a project on Tuesday, for instance, but
do not invoice until the following Fridayor even the end of the monthyou lose days of
income. Since you need the cash in your accountnot just in your profit marginsyou must
minimize the time between service rendered and service invoiced.










CASE STUDY
Managing working capital

The vast majority of survey respondents (80%) said operational efficiencies and cost
reductions are a priority which will require management during the coming year.
This was followed by profitability (75%), acquisitions (54%) and implementing new IT
systems / platforms to improve management or visibility of working capital (50%). Even
though working capital priority is lower compared to other items noted, cash flow is
ultimately ingrained in other initiatives.

Cost reduction programs whether it is for funding the initiative or impacting the flow of
cash for working capital should always be a component of any plan.

It is important for financial executives to monitor an organizations cash flow vital signs,
implement improvements and refine responsibilities. However, to achieve significant
improvement in working capital management, the financial executive must take a more
holistic view of the task.

By incorporating best practices of working capital management throughout the enterprise,
working with all divisions, financial executives can break through silos which may be
hampering progress. This can be achieved through communication and education with
employees across all departments, to help them understand why a culture of cash is important
to the health of the organization.

Everyone has a role to play in optimizing working capital. Results can be achieved with
incentives or other motivational mechanisms to encourage individual employees and
corporate units to take responsibility for their own role in optimizing working capital.
Some specific issues to consider when embarking on a working capital management program
include the following:




Receivables:Although there is a perception that collection calls can damage customer
relationships, this need not be the case. The first call, for instance, can be a service call rather
than a pure collection call. In many cases, the invoice itself may be delayed in distribution, is
not accurate or a potential dispute exists. Any of these could be the reason behind a delayed
payment.

Organizations should ensure controls are in place to identify and resolve invoice issues or
other disputes prior to the due date.Just as a company would analyse its customer database for
marketing purposes, so should it for accounts receivable. Organizations should ensure they
have sufficient reporting at the customer level to monitor payment patterns and identify
persistent late payers.

At a minimum, customer days sales outstanding should be monitored, however a
transactional based metric (e.g. weighted average days to receive payment) will provide the
most accurate performance trends.

Knowledge gained from reporting, together with an understanding of relevant market forces,
can assist an organization to develop collections strategies. Instead of treating every customer
the same way, organizations can consider a more segmented and tailored approach, based on
long-term trends and red flags (for instance, is the average payment period for a particular
customer or group of customers increasing?).

Certain customers should be contacted ahead of the due date, while others will require a cross
functional approach leveraging the sales department to ensure all channels of contact is open.
If a customer is taking an early payment discount and paying late, these should be reclaimed.
Finally, it is important to ensure credit limits are appropriate for the customer or industry to
manage risk of non-payment.

Are credit limits being followed, revised or refreshed on a consistent basis? A close
management of credit is important to preserve working capital performance and prevent the
risk of bad debt.



Payables: Ideally organizations should ensure at a minimum that cash disbursements are paid
no quicker than cash being received from customers. Organizations can analyse their supplier
base with a view to taking full advantage of the best paymentterms available. This will be
dependent on managing the trade-offs (price, service, cash flow, etc.) that exist within a
contractual negotiation.

A supplier that is more expensive may still be preferable than a less expensive supplier, if its
payments terms are better. Is purchasing centralized, in order to ensure purchasing power is
leveraged to achieve the best terms and conditions possible? Is there an authorization process
in effect to ensure procurement is following the terms of the contracts?

Are companies making early payments unnecessarily? Are early payment discounts being
used or missed? Monitoring the disbursements to suppliers is critical to prevent early or late
payments and even duplicated payments, often not detected by organizations.

In addition, financial executives should work to ensure that the payables process is as
streamlined and efficient as possible, taking advantage of opportunities for automation while
still incorporating best practices and the highest standards of internal control.
For instance, do receiving processes ensure that goods and services that have not been
received are not paid for in error? Do invoices actually match the purchase order?

Inventory management: This is an area with many moving parts for companies to manage.
When there is an excess of inventory, this creates a drag on working capital.

Fluctuations in demand are difficult to forecast with accuracy. Organizations should ensure
they adopt a robust sales and operations planning process including meeting regularly
(minimum monthly), establishing a single point of accountability for inventory performance,
monitoring demand patterns and adjusting orders and manufacturing to reflect current
requirements.





Slow moving or excess inventory should be monitored with root causes understood.
Strategies should be put in place to work through excess inventory and to dispose of
inventory that has become obsolete. It is also important to make sure that inventory data are
accurate, complete and that their integrity is preserved.

Supplier reliability should be a key area of review. Are suppliers delivering to contractual
obligations (i.e. on time in full)? Early or late receipts can impact supply patterns causing
need for additional safety stock to manage the variability and also potentially triggering
payments to suppliers earlier than required. Results of monitoring should be shared with
suppliers on a continuous basis to ensure they are aware and can address issues that may
exist.

In addition, to ensure working capital performance is meeting objectives, sufficient detailed
reporting should be established across all areas of working capital. Metrics should be specific
to the material drivers of performance and reviewed on a regular basis (at least weekly) by
relevant process stakeholders and management. These metrics can also be tied in with
variable compensation to ensure sufficient motivation is in place across the organization and
that strong performance is rewarded.








IMPROVEMENT OF WORKING CAPITAL
Although these are all essential aspects of business, the answer isnt any of the above. The
number one way to prevent business failure is to properly manage your working capital.
To ensure that were all on the same page, working capital is simply defined as the difference
between your current assets and current liabilities. If this figure is positive, you have working
capital available. This working capital may exist as inventory, accounts receivable, or cash on
hand.
Working capital management is a critical management issue for growing businesses or
medical practices. Take the example of a growing doctors office: As expenses rise with
patient-load increases, you accrue more outstanding cash, particularly before receiving
reimbursement from the health insurance payers. At this point, your incoming cash does not
nearly offset your costs going out. This may be manageable while you work with payments
for past services; however, eventually the time lag may become a significant stress-point for
your business.
By adopting a few working capital management strategies, you can make your assets work
for you, without becoming beholden to banks.
Strategy No. 1: Get Paid Now:
Lets take a look at the most obvious area: accounts receivable. What do your receivables do
for you when they are not being paid? While your profit margins may look stellar if you have
a lot of orders, you have essentially loaned all of your clients the amounts of your invoices
until they decide to pay you. Doctors, in particular, know the pain of this situation. Insurance
payers are particularly adept at prolonging the time for payment; they realize that the longer
they take to pay, the greater their profit margins.
Banks often measure accounts receivable at as low as 50 per cent of their overall value as
collateral for a traditional loan. In accounts receivable funding, however, accounts receivable
are calculated at full value. Plus, you accrue no debt for this financing, as you essentially sell
your accounts receivable for payment against the full value.
Perhaps the idea of selling your revenue stream makes you nervous. But consider this: You
usually receive 80 per cent of the entire amount of the invoice within one or two daysat
least 28 to 118 days sooner than usual. This cash injection allows you to make capital
improvements for your business to generate more revenue, leverage the cash for discounts on
your inventory, cover operating costs, or provide bonuses to your employees, for instance.
As your invoices are paid, your funder will repay the other 20 per cent, minus the negotiated
fee (average four to five per cent of the invoiced amount). Dont get hung up on the cost" of
the funding. With proper management of those funds, you will more than make up for fees by
the investments made in your business. Your day-to-day business costs may stay the same,
but the tremendous increase in incoming cash will enable you to rest easy.
Homework: Review your accounts receivable aging report. Note the average payment time
from one of your best clients or insurance payers. Assuming payment of 80 per cent of the
invoice value in 48 hours, make a list of ways to use that money for your business:
Cash discounts on inventory (estimate in dollar amounts).
Buying or leasing new equipment (anticipated return in additional sales).
New marketing campaign (anticipated additional revenue).
After you total the increased income generated by implementing this strategy, you can easily
see the real benefit.

Strategy No. 2: Shorten Your Operating Cycle:
Your operating cycle starts when you take cash out of your account to begin work for a client,
and ends the day the client pays you. If you complete a project on Tuesday, for instance, but
do not invoice until the following Fridayor even the end of the monthyou lose days of
income. Since you need the cash in your accountnot just in your profit marginsyou must
minimize the time between service rendered and service invoiced.
Homework: Review how long you usually take to invoice a client. If that period of time
exceeds a week, have your staff shorten that time. This adjustment will decrease the payment
time by as much as 25 per cent.
Strategy No. 3: Collect Past Due Accounts:
Do you have a significant number of invoices out more than 60 days? If so, are your staffs
doing anything to shorten this timeframe? Call the clients whose invoices have been out 30
days and inquire about the invoice. Devoting a few hours a week to completing this task is
money well spent if it ensures that even half of your outstanding invoices are paid a couple of
weeks earlier.
Some delays in the healthcare industry, for example, are intentional. Prolonging the
turnaround for payment controls costs. In these cases, you dont have any recourse. As any
doctor can tell you, calling the insurance company to inquire about a claim can be a fruitless
task.
Homework: Review your collections procedures and tighten up your ship, if needed. Assign
one person to follow up on invoices outstanding for more than 30 days. Realize, though, that
collections results fluctuate with your clients priorities. Dont count on this as your only
means of improving your cash flow.

Strategy No. 4: Turn Existing Equipment Into Cash:
As we know, keeping current with technology improvements are constant and necessary to
remain competitive. Leasing is a way to stay up-to-date without incurring the charges of
frequently buying new equipment.
But have you ever considered leasing equipment that you already own? One option is selling
your equipment to a leasing company, and leasing it back from them. This way, you generate
some cash for your business. You will, of course, incur the lease payments.
Homework: Take stock of what you own. If you need capital, contact a few leasing
companies and gauge their interest in purchasing equipment for you to lease back.
Alternatively, a Certified Cash Flow Consultant will shop for you. Since they are independent
consultants paid by the leasing companies, you will avoid any additional charges.

Strategy No. 5: When In Doubt, Outsource:
Outsourcing certain support areas of your business, in which you are not an expert, is an
excellent way to reduce payroll and insurance costs. You will spend a higher dollar per hour
for importing experts, but the reduced costs (no health or workers compensation insurance)
usually compensate for the cost variance.
Be sure to hire these experts with as much diligence as you would any in-house employee. As
youll typically retain this type of assistance through specialty staffing houses, interview the
individuals to be assigned. As integral members of your team, they must be as reliable as any
employee on your payroll.
Homework: Contact area firms that provide the kind of staffing you need. Compare the cost
of those contracts against the cost of keeping these staff on payroll. Be careful: Consultants
can get expensive, so be sure to build cost controls (i.e., fixed fee for a weekly basis or hourly
with a not to exceed" clause) into your contract. Be clear on their scope of work, to which
they report, and how you define satisfactory performance. In addition, you must directly
approve any staff changes.

Strategy No. 6: Inventory When You Need It:
Inventory that sits in the warehouse, not being sold for income, eats away at your available
cash flow. It is an asset, sure, but it should not become a liability because it is not quickly
converted to cash. Over-ordering of inventory gets many businesses into trouble.
Review your inventory forecast all the time, and be aggressive. Know your options in times
when you have shortfalls. Fulfilling customer orders on time is a number one priority, so
dont take unnecessary risks. If you simply hoard inventory to offset any chance of being
caught off-guard, you lose the potential profits made by managing it more aggressively.
Homework: Review your current and projected inventory for the coming months. Do you
need to make changes, or is it all under control? Make any necessary calls to your suppliers to
negotiate better terms or better understand their supply controls.
Make Your Working Capital Work for You:
Working capital management is a key element to business success and the number one way to
prevent business failure. By implementing strategies such as accounts receivable funding,
outsourcing, or inventory management, your business can optimize the return on assets it
already possesses. Your company will then be well positioned to handle future growth or
economic downturns.
The need for the working capital cannot be over emphasized. Every business needs some
amount of working capital. The need for working capital arises due to the time gap between
production and realization of cash from sales. Thus, in general working
capital is needed for the following purposes:

1. For the purchase of raw materials, components and spares.
2. To pay wages and salaries
3. To incur day-to-day expenses and overhead costs such as fuel, power, office expenses, etc.
4. To meet the selling costs as packing, advertising, etc.
5. To provide credit facilities to the customers.
6. To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc.
If you do pay cash, remember that this is no longer available for working capital. Therefore,
if cash is tight, consider other ways of financing capital investment - loans, equity, leasing
etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like
water flowing downs a plug hole, they remove liquidity from the business.

If you have insufficient working capital and try to increase sales, you can easily overstretch
the financial resources of the business. This is called overtrading.






CONCLUSION

Working capital management is an effective tool for management control. A business
undertaking requires funds for two purposes: -
To create productive capacities through purchase of fixed assets, etc.
To finance current assets required for day to day running of the Business.

It is obvious that a certain amount of funds is always tied up in raw material inventories
working progress, finished goods, consumable stores, sundry debtors and day-to-day cash
requirements. However, the business also enjoys credit facilities from his suppliers who may
give the raw materials on credit. Similarly a businessman may not pay immediately for
various expenses. But labours are paid periodically.

Therefore certain amount of funds is automatically available to finance the current assets
requirements. However, the requirements for current assets are usually greater than the
amount of funds available through current liabilities. In other words, the current assets are to
be kept at higher level than the current liabilities. This difference is known as working
capital.
The need for the study is to run day- to day business activities cannot be over emphasized.
We will hardly find a business firm which does not require any amount of working capital,
indeed, firm differs in their requirement of working capital. We know that firms aim at
maximizing the result of shareholders. In its endeavor to maximize shareholders wealth, the
firm should corn sufficient return requirement successful sales activity.
The firm has to invest enough founds in current assets for the sales do not convert into cash
instantly. In as much as a firm need adequate working capital to run its business operation it
should keep watch over situation that could lead to both excessive and in adequate working
capital position sincere that could be dangerous from the firms point of view.



The viability of an organization can be enhanced through effective and efficient management
of the firms working capital, working capital management has variously been defined by
authors and professional as the capital which can readily turned into each for payment of the
day to day expenses of the firms.
The need for financial resources is limited and costly and even where it is available, the
scope into which we could be applied and diverse.
A business that is just about to start production needs a fixed assets and adequate
working capital to pay staff salaries, wages and other administrative expenses.
The need for good management of capital should be the most important aspect of firms
over all financial management. This is because efficiency in this area of financial
management as necessary to ensure the firms long term success and to achieve its overall
goals which is maximization of owners wealth.
Cash flows in a cycle into, around and out of a business. It is the business life blood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.

If it doesn't generate surpluses, the business will eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital and investment.
The cheapest and best sources of cash exist as working capital right within business.

Good management of working capital will generate cash will help improve profits and reduce
risks. Bear in mind that the cost of providing credit to customers and holding stocks can
represent a substantial proportion of a firm's total profits.






Working Capital refers to the portion of the capital which is employed in the business to
carry on its day-to-day activities. It is used by the business to perform its operating
activities.

Working Capital is the life-blood of every business concern and accordingly, it has
immense importance to every business concern.

To carry on a continuous production process, the Working Capital is essentially required to
every business concern till sales realization occurs. Working Capital of a business provides
continuous finance for purchasing raw materials and payment of wages and overheads till
cash is brought back into the business by way of sales realization.

From the different basis or viewpoints, Working Capital may be classified in different
ways, such as gross Working Capital and Net Working Capital; positive Working Capital
and negative Working Capital; and permanent Working Capital and temporary Working
Capital.



























BIBLIOGRAPHY

www.capitalmarket.com

www.allbusiness.com

www.advancedbusinesscapital.com

Book on Working Capital Management- N. M. Vechalekar

Articles of Financial Management-N. M. Vechalekar