project on working capital

Index Sr. No. Particulars Page No. 1 Introduction and meanings 2 objectives 3 Types of Working Capital 4 Importance of Working Capital 5 Components of Working Capital 6 Working Capital Management 7 Working Capital Cycle 8 Sources of Working Capital 9 Factors Influencing Working Capital 10 Financial Ratio 11 12 13 14 15 16 17 Need of Accurate calculation of working capital Excess Working Capital Consequences of Excess Working Capital Shortage of Working Capital Consequences of Inadequate Working Capital Case Study Conclusion

Summary Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas which require closer management. Various techniques and strategies are available for managing specific working capital items.

Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to departments.

Introduction and meaning Every organization commercial as well as non-commercial requires some amount of fixed capital for procurement of fixed assets viz. land and building plant and machinery, furniture and fixtures, vehicles etc. in addition to fixed capital an organization requires additional capital for financing day to day activities. Such capital which is required for financing day to day activities is called as working capital. Working capital is required for smooth conduct of business activities. It is working capital which decides success or failure of an organization. It is the life blood of an organization. Shortage of working capital has always been the biggest cause of business failure. Lack of considerable foresight in planning working capital needs the business has forced even profitable business entities, the so called ‘blue-chip’ companies, to the brink of insolvency.

Working capital is warm blood passing through the arteries and the veins of the business and sets it ticking. New firms wind up for want of working capital. Even giants tumble like pack of cards through the drying up of working capital reservoirs. Liquidity and profibility are the two aspects of paramount importance in a business. Liquidity depends on the profibility of business activities and profibility is hard to achieve without sufficient liquid resources. Both these aspects are closely interrelated. Control of working capital and forecasting working capital is a continuous process and therefore, part and parcel of the overall management of the business.

working capital Definition Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital. Working Capital The number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt. Working Capital is the easiest of all the balance sheet calculations. Here's the formula: Current Assets - Current Liabilities = Working Capital One of the main advantages of looking at the working capital position is being able

preferred stock. inventory. there is no need to have a large amount of working capital available. A lower credit rating means banks charge a higher interest rate. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash. and late payments to creditor . it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold. a car. managements can simply stock pile the proceeds from their daily sales for a short period of time if a financial crisis arises. they can't raise cash as quickly. poor working capital leads to financial pressure on a company. increased borrowing. accounts receivable. These types of businesses raise money every time they open their doors. Since the inventory on their balance sheet is normally ordered months in advance. plant. The working capital ratio is calculated as: Positive working capital means that the company is able to pay off its short-term liabilities. On a balance sheet. especially that which could be converted to cash. real estate. assets are divided into the following categories: current assets (cash and other liquid items). . Also known as "net working capital". common stock.all of which result in a lower credit rating. It's easy to see why companies such as is must keep enough working capital on hand to get through any unforeseen difficulties. Asset Definition Any item of economic value owned by an individual or corporation. and other property. Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. long-term assets (real estate. Under the best circumstances. office equipment. Since cash can be raised so quickly. assets are equal to the sum of liabilities. securities. and retained earnings. which can cost a corporation a lot of money over time. then turn around and plow that money back into inventory to increase sales.to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. it may be too late). A measure of both a company's efficiency and its short-term financial health. inventory). Examples are cash. Because these types of businesses are selling expensive items on a long-term payment basis. Since cash is generated so quickly. accounts receivable. From an accounting perspective. A company that makes heavy machinery is a completely different story.

In other words. earning asset. Accounts receivables 3. net asset value. the following implications arise– 1. current assets include cash on hand and in the bank. Based on these characteristics of current assets. noncurrent asset. Working capital management involves making frequent decisions. cash ratio. return on assets. quick assets. 2. active asset. available assets. Cash balances are held only for a week or so. wasting asset. Depending on the nature of the business. to baked goods. which in turn is converted to finished goods. Inventories of o Raw material o Work-in-progress o Finished goods The two major characteristics of current assets are: • They have a short life span. to foreign currency. Accounts receivables are finally realised in cash. and marketable securities that are not tied up in long-term investments. capital asset. interest). operating asset. 2. Cash balances 2. stranded asset Current assets 1. The difference between profit and present value is insignificant. goodwill). Related Terms current assets. Since the various components of working capital closely interact with each other. plan asset. long-term assets. paper asset. Current assets of a firm include: – 1. alternative assets. Cash is utilised to purchase raw material. capital asset pricing model. fixed asset. hidden asset. and intangible assets (trademarks. accounts receivables typically are held for a duration of 30-60 days and inventories may be held for 30-100 days. prepaid and deferred assets (expenditures for future costs such as insurance. Raw material is converted to work-in-progress. current assets can range from barrels of crude oil. tangible asset. copyrights. Finished goods are sold for cash or credit. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. intangible asset. current assets are anything of value that is highly liquid. 3. rent. which creates accounts receivables. • They are rapidly transformed into other asset forms. decisions pertaining to one component must be taken after giving consideration to .equipment). asset-based lending. In personal finance. patents.

credit card debt. gym membership. insurance. rental income. debt. six months rather than one). • Discretionary Expenses: recreation/entertainment. We have listed the most common types of expenses below. It is generally wise to be conservative with the calculations. Determine the income: For most people. utilities. tools. movies. cable TV. or potential loss. tax refunds. books/magazines/CDs. gifts. A liability is a financial obligation. Include gross salaries and wages. This is especially important if cash purchases comprise more than 5% of your overall expenses. professional services (financial advisor. . and similar necessary expenses that have fixed monthly payments. but also more important because it's the side of the equation that you probably have more control over. charitable contributions. track your spending for a month (or two. no matter how small.). furniture. but be sure to itemize cash purchases (rather than just listing a single 'ATM withdrawal'). other loans. It includes: INCOME AND EXPENSES 1. if the inventory of finished goods is high. to flatten out any jumps or dips that may have happened in a single month. if you prefer). the firm may have to offer generous credit terms. Simply calculate and record the income you receive from various sources. child support or alimony payments received. claim. vacation. Begin by estimating how much you spend monthly on each type of expense. Determine the expenses: This step is more time-consuming than the previous one. grouping them into three basic categories. • Fixed Committed Expenses: mortgage. transportation. clothing/laundry. you should feel free to modify this list to suit your specific circumstances. etc. sporting goods. For instance. bonuses. pocket money. To save time. and other expenses that aren't strictly necessary for your survival. auto loan/lease.the effect on other components. this will be an easy step. phone. Of course. Track all expenses. Liabilities Definition Plural of liability. • Variable Committed Expenses: groceries. Try not to change your spending practices during this time. interest and dividend income. dining out. taxes. and not to include income that you aren't fairly sure you'll be receiving. For a more accurate estimate. savings. repairs/maintenance. you might want to total your income over a longer period (for example. you might want to use your monthly checking and credit card statements. and other similar sources of income. children's education. pension or Social Security income. medical bills. Next. 2. and similar necessary expenses that have payments which vary from one month to the next. attorney.

and cash. Policy For Cash Being Held Here a firm already is holding the cash so the goal is to maximize the benefits from holding it and wait to pay out the cash being held until the last possible moment. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal is to receive cash as soon as possible while at the same time waiting to pay out cash as long as possible. Ways to Manage Cash Firms can manage cash in virtually all areas of operations that involve the use of cash. Below are several examples of how firms are able to do this. Sometimes borrowing makes perfect sense. then your first priority should be to change this.3. such as to finance part of a college education. Previously there was a discussion on Float which includes an example based on a checking account. More importantly. but it is a dangerous one. Assume that rather than investing $500 in a checking account that does not pay any interest. there is almost certainly room for improvement (see InvestorGuide University: Paying for College. By . Credit Card Debt). you'll find that your income goes a lot farther. It's not an unusual situation. That example is expanded here. if your total spending exceeds your income. you should now be able to answer these questions: how much money is coming in? How much is going out? Where is it going? And on what am I spending more than I should be or thought I was? As a guideline. accounts receivable and payable. Further assume that the bank believes you to be a low credit risk and allows you to maintain a balance of $0 in your checking account. This allows you to write a $100 check to the water company and then transfer funds from your investment to the checking account in a "just in time" (JIT) fashion. most Americans spend about 70% of their income on fixed expenses. you invest that $500 in liquid investments. The management of working capital involves managing inventories. but if you have a substantial credit card balance that you're paying a high interest rate on. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. Compare income and expenses: Having completed the above steps. Borrowing money to meet monthly expenses is like quicksand: it gets harder and harder to escape from. As soon as you get that paid off. If you're in this situation it's important to get your spending under control before matters get any worse.

employing this JIT system you are able to draw interest on the entire $500 up until you need the $100 to pay the water company. 1. as they are needed in the production lines of a firm. Speculation Economist Keynes described this reason for holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favor the firm. credit sales are often made with terms such as 3/10 net 60. . By offering an inducement. Firms often have policies similar to this one to allow them to maximize idle cash. Sales The goal for cash management here is to shorten the amount of time before the cash is received. By using a JIT inventory system. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked for. JIT is a system where raw materials are purchased and received just in time. Why Firms Hold Cash The finance profession recognizes the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. a firm is able to avoid paying for the inventory until it is needed while also avoiding carrying costs on the inventory. accounts receivable. The providing of services and creating of products results in the need for cash inflows and outflows. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Firms that make sales on credit are able to decrease the amount of time that their customers wait until they pay the firm by offering discounts. Inventory The goal here is to put off the payment of cash for as long as possible and to manage the cash being held. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have. For example. inventory. "net 60. the 3% discount in this case." means that the bill is due within 60 days. The first part of the sales term "3/10" means that if the customer pays for the sale within 10 days they will receive a 3% discount on the sale. The three reasons are for the purpose of speculation. and for the purpose of making transactions. Transaction Firms are in existence to create products or provide services. This results in the firm receiving the cash earlier. The remainder of the sales term. firms are able to cause their customers to pay off their bills early. Precaution Holding cash as a precaution serves as an emergency fund for a firm. All three of these reasons stem from the need for companies to possess liquidity. Current assets include cash. for the purpose of precaution.

Estimating the amount of working capital required and identification of the sources from which the required funds have to be raised. current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets.marketable securities. Thus. with the idea to bring about a satisfactory level of working capital so that the business can run smoothly. In personal finance. Working capital management depends on several variables and hence efficiency and judgment on the part of managers and financial controllers are important requisites for the success of any commercial venture. current assets are also known as "current accounts". 2. prepaid expenses and other liquid assets that can be readily converted to cash. • Working capital management aims to strike a judicious balance between individual items of current assets and current liabilities and thereby achieves a reasonable safety margin. In the United Kingdom. Objectives of working capital Management: • The primary objective of working capital management is to manage the current assets and current liabilities of a business entity efficiently. Liquidity and its structural health. • Working capital management policies exercise strong influence on a company’s profitability. . the problem of working capital management is one of the ‘best utilization of a scarce resource. have become the twin objectives of working capital management.

Positive and Negative Working Capital. Gross and Net Working Capital Gross working capital means the total current without deducting the current liabilities. 2. bills payable and creditors for expenses. . Balance Sheet Capital and Cash Working Capital. 4. Permanent and Temporary working capital: Permanent working capital : A concern must always have a minimum amount of working capital at its disposal to be able to meet current liabilities as and when they arise. A concern must have minimum amount of Working Capital. In other words a concern must have minimum amount of funds to ensure liquidity and solvency. • In the initial stages to start the business and to commence the operating cycle.Types of Working Capital 1. 3. Therefore net working capital is equal to gross working capital – current liabilities or equal current assets current liabilities. Gross and Net Working Capital Permanent and Temporary Working Capital. However a part of the gross working capital is financed by current liabilities such as creditors for goods. 1. 2.

Positive and Negative working capital : Positive working capital : When current assets. and only if all the current assets are realized at book value. thus seasonal business like sugar factory require large amount of working capital during peak season and much smaller working capital once the season is over. Working Capital is also referred to as variable or fluctuating Working Capital. 3. However. Cash working capital : The net current assets indicates the amount of funds available to concern if. the actual cash realized from all current assets appearing in the balance sheet may be less than the book values because 1) Debtors : includes profit margin and 2) Depreciation : may have been included as an overdraft in valuation of closing stock of finished goods. debtors at cost and stock at actual cash cost. deposits. It eliminates the profit element from debtors and non cash expenses from stock to show the cash cost of working capital. in reality.e. Such Working Capital computed on the basis of book values of current assets and current liabilities is called balance sheet working capital. Example short term loans. Temporary Working Capital can be financed through temporary sources of finance.• Once the operating cycle has started then to keep the cycle moving in the regular course of business. This minimum amount of Working Capital is required to enable the concern to operate at the lowest level of activity. Negative working capital : . Balance sheet working capital and cash working capital : Balance sheet working capital Usually working capital is determined on the basis of the balances of current assets and current liabilities as per the closing balance sheet of concern. The cash working capital indicates the working capital at cash cost i. exceeds current liabilities the net current assets is a positive figure and hence it is called positive Working Capital. Permanent Working Capital is generally financed by means of permanent sources of finance. Such minimum amount of Working Capital is called permanent working capital. overdrafts. It is also called the core working capital. If they increase the level of activity is temporary or seasonal the additional amount of Working Capital required is called temporary working capital. Temporary working capital : If the concern wants to increase its level of activity and produce and sell more goods naturally it will need additional amount of Working Capital. 4.

Ability to grant credit to customers. All these require working capital. Even a business which is fully equipated with all types of fixed assets required is sire to fail without – a. Creating a stock of finished goods to feed the market demand continuously and d. cash to pay wages.When current assets are less than current liabilities the net current assets is negative figure and hence called as negative working capital. . Thus working capital is the lifeblood of a business without which a business will be unable to function. The importance of working capital is explained below : 1) Continuity in business operation : Continuity in business activities is possible only when there is continuous flow of working capital. No business will be able to carry day to day activities without adequate working capital. c. Importance of working capital : Every running business needs working capital. 2) Increase Credit Worthiness: A business firm which is able to honour its commitments does enjoying a good name in the credit market. The working makes it possible to keep the business operation moving. power and other costs. This enables the firm to obtain raw material on longer credit terms and also to obtain loans and advances form the banks. adequate supply of raw materials for processing b.

6) Easy availability of Bank Loans: Adequate working capital raises the credit standing of a company. 1) Stocks : a) Raw material : How much raw material should be stored by the concern to ensure smooth production has to be estimated. Components of Working Capital 1. This creates a confidence in minds of the shareholders. The company can also maintain machines good condition. Current Assets : It includes estimating each item of current assets like stocks. It can spend on training and development of personnel. Let us see how each item of current assets is based in the basic formula. 5) Regular Dividend payment : Regular payment of dividend is possible when adequate working capital is available with the company. Without sufficient working capital it would be impossible to repay debentures. Example it may deicide to store two months . long term loans and other liabilities. Banks are willing to offer loans to such companies. 4) Repayment of Long Term Loans: Working capital is used to repay long term loan and debenture. 7) Increase Efficiency and productivity : Those companies which do not face working capital problems do provide good working conditions and welfare facility to the staff and workers. Greater the level of current assets estimated higher will be the working capital requirement. 8) Enable to face competition : Working capital enables the firms to meet the challenges of the competitors. Adequate amount can be used to advertise and to undertake sales promotion strategies. debtors. cash and bank balance at required level of operation.3) Goodwill : A company which meets its working capital needs without much difficulty brings a good name to itself and in the labour and capital market.

g. Stock of work in progress is estimated as the total of the following amount (based on some formula [amount]*[duration of operating cycle] c) Finished goods: Closing stock includes finished goods if they are not sold. included profits. Company’s investment in debtors upon time lag in payments by debtors. If all sales are on cash basis. Wages not converted into finished goods remain in stock as WIP. Value of finished goods stock is equal to [Units per month*Cost of Production]*[no of Finished Goods required to be stored] 2) Debtors: Second major component of Working Capital is debtor. any stock of WIP is made up of 100% cost of raw material and 50% cost of wage and overhead. Working Capital required will be higher.production in stocks. there will be no debtors. [Units * cost]*[no.e. Value of stock of material (RM) is estimated as follows. of months RM required to be stored] 2) Work in progress: It includes raw material processed at different stages. if goods are sold two month after production. then value of stock should not include selling and distribution which is finance overhead.e. The period for which finished goods remain in store before sale should be considered while estimated stock of finished goods for e. selling price-profit. If the period of credit allowed to debtors is longer. before the due date. Finished stock is valued at cost of production that is including cost of material. Therefore. Higher the requirement of liquid cash greater will be Working Capital.Debtors may be estimated at selling price i. Debtors may be estimated at cost (cash cost basis) i. 2. For a company allowing four months credits investment in debtors will be equal to four months credit sales. We have to estimate which expenses are payable in advance and to that extent requirement of working capital would be higher. If classification of overheads is given. 3) Pre-paid Expenses: Some expenses like insurance sales promotion would be paid in advance i. There are two ways of estimating debtors 1. It means the partly finished material which requires further processing. . Material is introduced in the beginning of the process and normally it is assumed that wages and overheads accrue evenly during the production process. Labour and overheads.e. Profit should not be included as it is not be included as it is not yet realized in cash. Expenses paid in advance are estimated as follows [Total units*expenses per unit]*[period of payment] 3) Cash and Bank Balance: Every business concern has to estimate cash or bank balance necessary to meet the day to day expenses. stock of finished goods will be equal to two months production.

so that they can guide senior management in an . Current liabilities are deducted from current assets to calculate working capital. two months would have a current liabilities of expenses outstanding equal to two month wages. MANAGEMENT OF WORKING CAPITAL: “Working Capital (net)”. the principles of effective working capital management and the working capital cycle.e.II. Working capital management is an attempt to solve the problems that arise in the management of current assets and current liabilities. Within the C5 syllabus “Managing Finances”. [Total units* expenses per unit]*[period of late payment] 3) Advance from customers: Some companies take advance from customers before executing their sales order. generally means excess of current assets over current liabilities. outstanding expenses etc. Creditors for material are estimated as follows Creditors= [units* purchases price per unit]*[credit period obtained] 2) Outstanding Expenses: Time lag in payment of expenses like wages. 1) Creditors: Credit allowed by supplier on purchases of raw material gives rise to a current liability namely amount payable to creditors. Certified Accounting Technicians need to develop competence in this important area of financial management.” therefore. there is reference to working capital in both the aims. Students need a knowledge of how organisations optimise their use of working capital. refers to all aspects of managing and controlling current assets and current liabilities. as we have discussed already in the earlier paragraphs. If we can pay for the purchases later. outstanding expenses. A company which pay all expenses immediately in cash will have no outstanding expenses where as company which pays wages after. So higher the current liabilities lower will be the Working Capital requirement and vice versa. These are the funds available with the company and are refundable only if sales order is cancelled. Higher advances collected from the customers would mean lower needs of Working Capital for the company. “Working Capital Management. say. to that extent we need less funds and lower requirement of working capital. objectives and content. Current Liabilities: Next important step in estimating Working Capital is estimating current liabilities. A company which makes all purchases in cash will not have creditors where as a company enjoying longer credit will have large amount of creditors. Let us study how to estimate the current liabilities like creditors. salaries or other overheads gives rise to current liabilities i.

so as to minimise the risk of insolvency while maximising return on assets. and cash. and • ensure the long term survival of the business entity. and cash. plant and equipment. and the additional net revenue that can be earned by doing so. ultimately to cash starvation. the right equipment and skilled human resources. debtors. . The former can be kept to a minimum with effective credit control policies which will require: • setting and enforcing credit terms. and • overtrading (trying to maintain a level of sales which is higher than working capital can sustain – for businesses which extend credit terms. tends not to vary in the short term but to move up (or down) in jumps when major investment decisions are made (or assets sold). as the name implies. • vetting customers prior to allowing them credit. Characteristics of over-capitalisation are excessive stocks. less creditors. and if unchecked. Poor working capital management can lead to: • over-capitalisation (and therefore waste through under utilisation of resources and hence poor returns). and ‘working capital’ principally to pay for stock and to cover the amount of credit extended to customers. To invest business needs capital – either from owners. Overtrading leads to escalating debtors and creditors. is much more fluid and fluctuates with the level of business. • pay government taxation and providers of capital – dividends. The working capital cycle links directly with the cash operating cycle. Taking control of working capital means focusing on its main elements. on the other hand. low return on investment with long term funds tied up in non-earning short term assets. Working capital management then is to do with management of all aspects of both current assets and current liabilities. Working capital. Liabilities are settled with cash not profits. The primary objective of working capital management is to ensure that sufficient cash is available to: • meet day-to-day cash flow needs. • pay wages and salaries when they fall due. debtors. Successful business centres on investing in innovatory ideas. Value added conversion work in progress Even profitable companies fail if they have inadequate cash flow. Working capital comprises short term net assets: stock. Fixed capital. There are two types of capital need: for ‘fixed capital’ to invest in things such as buildings.effective way. more sales means more debtors and higher working capital demands). and thus make a positive contribution to this “value adding” activity within any organisation. Control of the debtors’ element (the amount owed the business in the short term) involves a fundamental trade-off between the cost of providing credit to customers (which includes financing bad debts and administration). retained profits or from others willing to advance credit or loans. • pay creditors to ensure continued supplies of goods and services. • setting and reviewing individual credit limits.

• efficient invoicing and statement generation. eventually building up to a huge order and a disappearing customer. • effective chasing and collection procedures. Collection is a vital element of credit control and must include standard. This means controlling buying. The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out. The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge large interest on late payment of business debts by companies and public sector organisations. positive credit control calls for the setting of a credit limit. and hence reduce interest costs. Inherent in any system of inventory control is the concept of appropriate stock levels – normally expressed in physical units sometimes in monetary terms. polite and well constructed reminder letters. But this is not a one-off requirement. and credit charges (if any). any settlement discounts. and effective telephone or e-mail follow up. . Nevertheless. but in the meantime represents working capital tied up in the business. Debtors represent future cash – or they should do if proper credit control policies are pursued. Efficient control of debtors will assist cash flow. and help keep overdraft or other loan requirements down. Credit checking. Use of collection agencies should be considered. should therefore feature in regular procedures. Keeping levels to the minimum required for efficient operations will keep costs down. When the creditworthiness of a new customer is established. even for established customers. and • limits beyond which legal action will be pursued. the period. as could factoring – in its most comprehensive form a loan facility based on outstanding invoices plus a sales ledger and debtors control service. Salesmen’s views can also be canvassed and the premises of the potential customer visited. • prompt query resolution. past experiences with this customer or trade sector. One classic fraud is to start off with small amounts of credit. • continuous review of debtors position (generating ‘aged debtors’ report). Before allowing credit to a new customer trade and bank references should be sought. Accounts can be asked for and analysed and a report including any county court judgements against the business and a credit score asked for from a credit rating business (such as Dun and Bradstreet). issuing. the credit period. and recording stock. Likewise stock will eventually become cash. handling. storing. with invoices being settled promptly. From last November they were also able to take similar action against other small businesses. and the importance of the business that is involved. it is wise to inform customers this right will be exercised. The extent to which all means are called upon will depend on the amount of the credit sought.

can incur interest charges. Just as in credit control. upset their suppliers who may refuse future orders. amounts owed by the business for supplies and services. they lose out on cash discounts. and the • reorder quantity or economic order quantity – the quantity of stock which must be reordered to replenish the amount held at the point delivery arrives up to the maximum level. Firms that go beyond agreed credit limits run into trouble. Four basic levels will need to be established for each line/category of stock. • average consumption or production requirements. and so that they can be paid when due with appropriate discounts deducted. a settlement policy has to be in place so that invoices are properly authorised for payment (after any queries have been answered and credits claimed). • reordering periods – the time between raising an order and receiving delivery of goods. Trade creditors. are a plus in the working capital equation. Control policies should include designating responsibility for raising and authorising orders.The factors to consider when establishing the control levels are: • working capital available and the cost of capital. But there are limits to the good news. the more has been extended by others (usually at no cost) towards working capital needs. • storage space available. and even find themselves in court with additional costs and penalties to pay. • reorder level – point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received. • likely life of stock – bearing in mind the possibility of loss through deterioration or obsolescence. There are the: • maximum level – achieved at the point a new order of stock is physically received. Again. may damage their credit rating. Credit periods vary from industry to industry with usual terms range from 28 days to 95. • minimum level – the level at point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies). • market conditions. • economic order quantity (including discounts available for quantity). Once these controls are implemented an efficient system of recording receipts and issues is vital to exercise full control of inventories. The higher the figure. and • the cost of placing orders including generating and checking the necessary paperwork as well as physical checking and handling procedures. signing delivery notes and authorising payment of invoices. an eye has to be kept on the overall position with appropriate reports generated. .

improved working capital control. or revised fixed asset investment plans. it is worth looking further. it will be necessary to decide how these can be covered. There are two levels of control. A broad indication of a firm’s short term ability to finance its continued trading can be obtained by applying the ‘current ratio’. Much will depend on the type of trade and the nature of both current liabilities and current assets. For example it may be able to improve cash flow by improvements in operating efficiency or higher sales prices. Various ratios are considered important indicators of working capital strength (and can be applied internally or to potential customers). For example a large element of prepayments in creditors will mean they will not be repaid but will be earned over time. risk and return of investments must all come into play with the length of time before funds are needed playing an important role. often for long afterwards. order stock or pay creditors if there is not the cash available to meet working capital demands. • anticipate cash surpluses and deficits in time to generate plans to deal with these. and debtors are more value than stock (they . They can also bring analytical skills into play. and ensuring any surplus balances are put to interest earning use.Cash is both the balancing figures between debtors. stock and creditors. If the latter should be less than the former. Longer term cash flow control will embrace all aspects of the business including working capital and fixed capital control. The first concerns efficient banking – making sure money received is banked as soon as possible. Cash flow forecasts form an integral part of the budgeting process. The objectives of the cash budget are to: • integrate trading and capital expenditure budgets with cash plans. More fundamental than this is cash flow control – making sure funds are available when needed. cash is the most valuable element (it is immediately available to settle bills). sometimes always. or even sale of an asset. Generally when it comes to current assets. and also the control element. In the short term this is best achieved by preparation of weekly or monthly forecasts for comparison with actual results. rescheduling plans and payments. Many businesses operate this way when they start. typically by use of ratio analysis. and • provide a facility for comparison between budget and actual outcomes. trading and dividend policy. Immediate solutions will include increased borrowing. capitalisation. This is a straight comparison of current assets and current liabilities. It is not possible to extend credit. making payments the most efficient way. debtors escalating at a faster rate than sales growth could indicate poor credit control and possible bad debt problems. Here the liquidity. On the other hand. Accountants have an important part to play in all aspects of working capital control – through internal control procedures (such as invoice authorisation) and through reporting processes (such as production of ‘aged debtors’ lists and cash flow forecasts). If these forecasts indicate unacceptable balances or deficits are likely at some point.

It is the business's life blood and every manager's primary task is to help keep it flowing and to use the . around and out of a business. To estimate the working capital required. Movements of cash through the above processes is called ‘circular flow of cash’. Total operating expenses of the year divided by the number of operating cycles in that year is the amount of working capital required. b) Conversion of raw materials into finished products. If the flow continues without any interruption. Material cost is partly covered by trade credit from suppliers and successive operational activities also involve cash flow. The period required to complete this flow is called ‘the operating period’ or ‘the operating cycle’. This concept is based on the continuity of flow of funds through business operations. better working capital control will be required. This flow of value is caused by different operational activities during a given period of time. The operational activities of an organization may comprise.are nearer to being turned into cash). This is calculated by dividing the number of days in a year by the length of the cycle. If current assets less the stock element total less than current liabilities the business. or insolvency may be looming. WORKING CAPITAL CYCLE Alternatively known as ‘Operating Cycle Concept’ of working capital. c) Sale of finished products and d) Realization of accounts receivable. Cash flows in a cycle into. Hence the tougher test – the ‘acid test’ – excludes the stock element from current assets. on the face of it. the number of operating cycles in an year is to be calculated. a) Purchase of raw materials. And that suggests more finance might be needed. may not be able to settle its creditors as they fall due. operational activities of the company will also continue smoothly.

and MONEY. if cash is tight. equity. the more cash it will need for working capital and investment. 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.TIME IS MONEY.. More businesses fail for lack of cash than for want of profit. vehicles etc. get longer credit or an increased credit limit. the business will eventually run out of cash and expire. Similarly.. you effectively create free finance to help fund future sales.. Good management of working capital will generate cash will help improve profits and reduce risks. Therefore. Working capital operating cycle Investment in working capital is influenced by four key events in the production and sales cycle.. Similarly. payment for their purchase.. computers.g. If you do pay cash.. • Collect receivables (debtors) faster You release cash from the cycle • Collect receivables (debtors) slower Your receivables soak up cash • Get better credit (in terms of duration or amount) from suppliers You increase your cash resources • Shift inventory (stocks) faster You free up cash • Move inventory (stocks) slower You consume more cash It can be tempting to pay cash.. Importance if Operating Cycle Concept. The cheapest and best sources of cash exist as working capital right within business..... and collection of cash for the sales made. TIME . The main sources of cash are Payables (your creditors) and Equity and Loans... for fixed assets e.. collect monies due from debtors more quickly) or reduce the amount of money tied up (e. they remove liquidity from the business. the sale of finished goods. receivables and payables) has two dimensions . leasing etc. The faster a business expands. Definition of operating cycle . in theory.g.Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). plant. When it comes to managing working capital . if available. then it should... if you can negotiate improved terms with suppliers e.. remember that this is now longer available for working capital.g. consider other ways of financing capital investment . If you can get money to move faster around the cycle (e. There are two elements in the business cycle that absorb cash .. reduce inventory levels relative to sales). As a consequence. these are cash outflows and... generate cash surpluses..g. like water flowing down a plug hole. Then . These events are: purchase of raw materials. you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Each component of working capital (namely inventory..loans. If you . if you pay dividends or increase drawings.cashflow to generate profits.. the business will generate more cash or it will need to borrow less money to fund working capital. If a business is operating profitably.... If it doesn't generate surpluses.

4. upgrade the system of production and select the shortest possible manufacturing cycle. which are paid for after a delay representing the creditor's payable period. Reduction of Operating Cycle. the following suggestions can reduce the length of operating cycle. 2. • The period between purchase of raw materials and production of finished goods is known as the inventory period. • Upon sale of finished goods on credit terms. It is very important for deciding cash working capital required to meet the operating expenses of a going concern.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 manager should make all possible efforts . The concept is important because longer the operating cycle. The time lag between the payment for raw materials purchases and the collection of cash from sales is referred to as the cash cycle. 3. • The period between sale of finished goods and the collection of receivables is known as the accounts receivable period. Every management tries to reduce the operating cycle in order to decrease the need of working capital. Purchase Management The purchase manager to ensure availability of right quantity of material at right time. at right price and at right place. The management has to see that this cycle does not become longer. • These purchased raw materials are then converted by the production unit into finished goods and then sold. Production Management : The production manager to look after proper maintenance of plant and machinery and plan and co-ordinate all the activities. The time lag between the purchase of raw materials and the sale of finished goods is known as the inventory period. This period is known as the accounts receivables period. Effective Credit Policies The finance manager should streamline the credit and collection policies and minimize the investment in debtors. there exists a time lag between the sale of finished goods and the collection of cash on sale. more will be the requirement of working capital. Operating cycle of the company The entire sequence of operations in a company can be summarised as follows: • The operating cycle for a company primarily begins with the purchase of raw materials. 1. The operating cycle can be depicted as: • The stage between purchase of raw materials and their payment is known as the creditors payables period. Marketing Management : The marketing manager should adopt various techniques of sales promotion and reduce the period of storage of finished goods in the warehouse.

5. 2) Bank Overdrafts : Bank Overdraft facilities consist of an agreed line of credit on which a small business entrepreneur can draw current account cheques. EXIM policies have an impact on operating cycle. It is very convenient source of finance.to collect the book debts promptly. Trade credit is generally granted for a period of 30 days. . The extent of credit is subjective and depends upon the individual circumstances. Sources of Working Capital 1) Trade Credit : This is them most important source of working capital. The management should minimize the adverse impact of these policies on the operating cycle. 60 days. 90 days and 120 days after purchase. Length of operating cycle is also influenced by other external environmental factors. government fiscal and monetary policies. Commercial banks generally provide overdraft is generally arranged in conjunction with a cash requirement of the firm.

It is internal source of financing as accumulated saving are used for meeting the current needs of the business. 4) Bill Discounting : The bills receivable from the debtors are discounted with the banks. The maturity period normally ranges between 90 to 180 days. Generally. well established companies with sound financial background are able to issue commercial paper.3) Cash Credit This represents the overdraft facility on the hypothecation of inventories and book debts. 8) Commercial Paper : Commercial paper represents short term unsecured promissory notes issued by firm which enjoy a fairly good credit rating. liability is absent. Sources of Additional Working Capital Sources of additional working capital include the following: • Existing cash reserves • Profits (when you secure it as cash !) • Payables (credit from suppliers) • New equity or loans from shareholders • Bank overdrafts or lines of credit • Long-term loans . Self-financing is economical as interest payment. 5) Self – Financing: Self – finance is one of the most important methods of meeting fixed capital requirement. Periodic inventory and ebtor’s statement have to be submitted to the bank. the company may have to pay interest on such deposits which is reasonably low. 6) Packing credit facility for Exporters : The commercial banks in India offer packing credit or Pre-Shipment finance to the exporter on the basis of confirmed export order and / or letter of credit issued by the importers bank. Commercial paper is sold at a discount from its face value and redeemed at its face value. there are no complicated formalities in obtaining such advances. Normally. This facility helps ion realizing finds fast without waiting for the maturity period to get over. Again. 7) Dealers Advance : Dealer or customer advances enables the firm to meet its working capital needs.

offering high discounts for early cash payment • Bank overdraft exceeds authorized limit • Seeking greater overdrafts or lines of credit • Part-paying suppliers or other creditors • Paying bills in cash to secure additional supplies • Management pre-occupation with surviving rather than managing • Frequent short-term emergency requests to the bank (to help pay wages. Production Policies Production policies of business organization exert considerable influence on the requirement of working capital. They are as follows : 1. Early warning signs include: • Pressure on existing cash • Exceptional cash generating activities e.If you have insufficient working capital and try to increase sales. Production policies depend on the nature of the . Public utilities require less working capital as they sell services on cash basis only. 2. A treading organization requires proportionately larger working capital as it has to carry large inventories and allow credit to customers. Nature of Business : The quantum of working capital required by a business organization is related to the type and nature of its business activities. you can easily over-stretch the financial resources of the business. A manufacturing concern requires more working capital as compared to a firm engaged in trading.g. This is called overtrading. However. FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS. the requirement of working capital varies from industry to industry and from time to time in the same industry. The amount if working capital required by a business organization depends if many factors. pending receipt of a cheque).

Turnover of Circulating Capital. greater amount of working capital will be required. Business Cycle: Business expands during the period of depression. Simple and short production process requires less working capital. like sugar and oil mills. In case of other forms like Partnership Firms. whereas an organization selling goods in credit would require more working capital. Turnover of Inventories: A business organization having low inventory turnover would necessitate more working capital whereas. Production Process : If the production process stretches over a long period of time.: The speed with which circulating capital completes its cycle i. This . Large organizations require more working capital than smallscale organizations. 3. 11. Dividend policies of a business organization also influence the requirement of working capital. 5. Whereas a liberal dividend policy demands higher working capital. Terms of Purchases and Sales : A business organization making purchases on credit and selling on cash terms would require less working capital. 6. large amount of working capital would be required.. conversion of cash into inventory of raw materials. Dividend Policies. more working capital is required during peak seasons as compared to slack seasons. it is a case of policies of drawing by partners. Slow movement of working capital cycle necessitates larger provision of working capital. Inflation: a business concern requires more working capital during inflation. decides the working capital requirements of an organization. a conservative dividend policy will not act as a constraint on working capital resources. More working capital is required during the period of prosperity and less during the period of depression.product. 10. raw materials into finished goods. If payment is to be made in advance to suppliers. 8. 4. high inventory turnover would necessitate limited working capital. Seasonal Variations: In case of seasonal industries. finished goods into debts and debts into cash. 7. This is relevant for companies. 9. The level of production decides the investment in current assets which in turn decide the quantum of working capital required.: The amount of working capital required depends on the scale operations of the business organization. Size of the business unit.e.

Changes in Technology: Changes in technology as regards production have impact on the need of working capital.factor may be compensated to some extent by rise in selling price. customers are highly likely to switch over to competitor’s products. Otherwise. • Market conditions – The level of competition existing in the market also influences working capital requirement. Such firms have greater working capital requirements during peak seasons and lower requirements during other seasons. the firm will have to obtain raw material when it is available. If supply is scarce and unpredictable or available during particular seasons. Firms whose sales are not affected by seasons have stable working capital requirements. import and taxation policies pursed by the Government are some of the numerous factors that decide the working capital requirements. When competition is high. It would thus need more working capital to carry a large inventory and conduct operations all year round. 13. It thus has greater working capital needs. • Seasonality of operations – Some firms’ products sell only during particular seasons. the degree of co-ordination between production and distribution policies. When competition is low. • Supply conditions – If supply of raw material and spares is timely and adequate. 12. For instance. the firm can afford to have a smaller inventory and would consequently require lesser working capital. Financial Ratio Analysis Introduction . but demand for the product is high. Other Factors: In addition to the above. the company should have enough inventory of finished goods to meet a certain level of demand. mean of transport and communication. the firm can get by with a comparatively low inventory level. air conditioners sell more during the summer than in the winter.

financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation. Obsolete stock.Financial ratio analysis calculates and compares various ratios of amounts and balances taken from the financial statements. to get a discount this will decline.. The main purposes of working capital ratio analysis are: • to indicate working capital management performance.. easily calculated. Consequently. can be misleading. you pay your suppliers every x days. slow moving lines will extend overall stock turnover days. situations which require control might not be apparent. If your official credit terms are 45 day and it takes you 65 days. Comparisons between them. whereas unfavourable results are usually significant. just in time ordering will reduce average days. If you negotiate better credit terms this will increase. favourable results mean little. The following ratios are of interest to those managing working capital: • working capital ratio. Faster production. • debtors ratio. Three key points need to be taken into account when analyzing financial ratios: • The results are based on highly summarised information. Receivables Ratio (in days) Debtors * 365/ Sales = x days It take you on average x days to collect monies due to you. • creditors ratio. Effective debtor management will minimize the days. However. You may need to break this down into product groups for effective stock management. Ratio Formulae Result Interpretation Stock Turnover (in days) Average Stock * 365/ Cost of Goods Sold = x days On average. ratios are important measures of working capital utilization. Payables Ratio (in days) Creditors * 365/ Cost of Sales (or Purchases) = x days On average. or situations which do not warrant significant effort might be unnecessarily highlighted. or with global "ideal" ratio values. • liquid interval measure. fewer product lines. say. If you simply defer paying your suppliers (without . • stock turnover. you turn over the value of your entire stock every x days. • Ratio analysis is somewhat one-sided. If you pay earlier. • Different departments face very different situations. and • to assist in identifying areas requiring closer management. why ? One or more large or slow debts can drag out the average days. • Working Capital Ratios The following.

so here is the information to help us work out its current ratio. the quality of service and any flexibility provided by your suppliers may suffer.agreement) this will also increase . that is. 1. The "quick ratio" a derivative. 0.75: 1 The Carphone Warehouse is our business of choice. For example. There are also other possible refinements.00 you owe. 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. the trends-the way in which the liquidity is changing-will become apparent. • Liquid Interval Measure Liquid Assets divided by Average Operating Expenses This is another measure of liquidity.5 times means that you should be able to lay your hands on $1. excludes inventories from the current assets. Working Capital Ratio (Inventory + Receivables . As we saw in the brief review of accounts section with Tesco's financial statements. the level of safety provided by the excess of current assets over current liabilities. the working capital ratio looks like this: Current Assets: Current Liabilities = x: y eg 1. It looks at the number of days that liquid assets (for example.g. the phrase current liabilities is the same as Creditors: Amounts falling due within one year. There is no particular benchmark value or range that can be recommended as suitable for all government departments.Payables)/ Sales As % Sales A high percentage means that working capital needs are high relative to your sales. if a department tracks its own working capital ratio over a period of time.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.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 Current Assets divided by Current Liabilities The working capital ratio (or current ratio) attempts to measure the level of liquidity. Quick Ratio (Total Current Assets .50 for every $1. considering only those assets most swiftly realisable. • Stock Turnover .but your reputation. The Current Ratio The current ratio is also known as the working capital ratio and is normally presented as a real ratio. However. That is. inventory) could service daily operating expenses (including salaries). Less than 1 times e. Current Liabilities are amount you are due to pay within the coming 12 months.

The best way to explain this relationship is to express it as the number of days that credit sales are carried on the books: Credit Sales per Period x Days per period Average Debtors Where trading terms are 30 days net cash. so this ratio will have only limited relevance. a higher turnover ratio indicates that a lower level of investment is required to serve the department. It indicates the speed with which inventory is sold-or. a collection period of 45 days (the average between 30 and 60 days) would be satisfactory. In general. sales other than to the Crown). • Creditor Ratio This ratio is much the same as the debtor ratio. credit purchases should not be carried on the books for more than an average of 45 days. if sales decrease debtors will decrease. but it acts as an indicator that an adverse trend is developing. If payment is withheld for 60 days or more it is likely that creditors will become impatient and impose stricte . debtors will increase.Cost of Sales divided by Average Stock Level This ratio applies only to finished goods. As with debtors. but the trend over time is a good indicator of the validity of changes in inventory policies. It can be used for the inventory balance as a whole. The figure produced by the stock turnover ratio is not important in itself. for classes of inventory. debtors are holding cash that should have flowed into the department. while maintaining a good relationship with creditors. The department's objective should be to make effective use of this source of free credit. and conversely. This means that the department is unable to satisfy pressing liabilities or to invest that cash. The debtor ratio does not solve the collection problem. Remedial action can then be instigated. It can be stated as the number of days that credit purchases are carried on the books. how long inventory items remain on the shelves. If the average collection period extends beyond 60 days. There is no need to pay creditors before payment is due. if a department has been granted credit terms of 30 days net cash. If sales increase. Most departments do not hold significant inventories of finished goods. Credit Purchases per Period x Days per period Average Creditors Note that non-credit purchases (such as salaries) and non-cash expenses (such as depreciation) need to be excluded from "credit purchases" and any provisions need to be excluded from "creditors". and customers buy from day-to-day during the 30 day period and pay 30 days after a statement is rendered. or for individual inventory items. It expresses the relationship between credit purchases and the liability to creditors. • Debtor Ratio There is a close relationship between debtors and credit sales to third parties (that is. to look at it from the other angle.

"cash on delivery". It restricts to a maximum of 90 days the purchase of goods and services through the use of a credit card or suppliers' credit. Neglecting proper assessment of working capital can therefore affect the day to day operations severely. 4) The over investment in working capital makes the capital less productive and . Excess of Working Capital Whenever a company has extra working capital than required one than it is called as position of excess of working capital. Suppose excess position of working capital is because of heavy borrowings interest charges will be very high as a result the net profit of the business is affected. so to say the working capital is available is more than requirement it is known as overcapitalization as a result of it there is a hung investment in raw material and finished stock.r and less convenient trading terms-for example. Unnecessary expenses will be increased on non-productive lines likewise facility given by bank may not be fully utilized. This position is also called as under trading. The Public Finance Act 1989 (section 49) places a legal constraint on the amount of credit allowed to a department. Consequences Of Over Assessment Of Working Capital 1) Excess of working capital may result into unnecessary accumulation of inventories. 2) It may lead to excessively liberal items to buyers and very poor recovery system and cash management. On account of large stock and also sufficient cash in hand is there. 3) It may take management complacent leading to its inefficiency. Need of Accurate calculation of working capital: The working capital has very close relationship with day to day operations of a business. It may lead to cash crises and ultimately to liquidation. Inaccurate assessment of working capital may cause either under assessment or over assessment of working capital and both of them are dangerous. liberal credit facility is given to debtors resulting into more losses in form of bad debts increasing collection charge of debts. On account of sufficient working capital liberal dividend policy may be adopted which may effect long-term investment of business as it is not possible to curtail dividend in future.

2. Purchase Of Fixed Assets Without Raising Long Term Funds:Whenever fixed Assets have to be purchased there is an intention to hold then for a long period therefore outflow of funds in this account will not generate cash as in working capital cycle. 1. either from debentures issued in market or long term loans or issue of capital. Operating Losses:In case of operating losses cash outflow in form of expenses is more than cash inflow in which ultimately result in deficiency of working capital. 5. 4. It is always accepted fact that the profit need not be always in cash.g. Therefore if the dividend is declared by looking only into profit angle than there will be shortage of cash resulting into deficiency of working capital. earth queaks. The concern is not able to current liabilities and the reputation of the concern gets damaged.Liberal dividend Policy:Whenever there is liberal Dividend policy outflow of cash on account of dividend will be high. Incase of its fall the outflow takes palace from current block resulting into deficiency of working capital. whenever this type of investment is required it is necessary that funds should be raised from long term sources i. In the business. Cause for Shorting of Working Capital 1. Therefore.Redemption Of Preference Capital Without Bringing In New Capital Or Dedentures:It is principal of financial management that outflow of cash on account of payment of non-current liabilities should be made good from non current sources. natural calamites like flood.Payment Of Interest Before It Becomes Due:Whenever interest is paid in advance which are not due . . the position is considered as shortage of working capital. Shortage Of Working Capital When working capital available in business is less than actual requirements. 3.e. Extra Ordinary Losses:On account of non recurring items will be extra expenses causing outflow of cash therefore effecting regular cash position and creating storage e. it causes ultimately outflow of cash resulting into working capital shortage. This position is also named as sickness in business. hence position is called as undercapitalization. Consequences of Inadequate Working Capital 1. in this circumstances capital available is less than requirement of business. There will be shortage of raw materials or finished stock therefore schedule of production and sales schedule cannot on efficiency.may reduce return on investment.

The main aim if management of working capital is to see that the amount invested in working capital is neither excessive nor short. normally working capital management involves three important components of current assets viz. . 4. 5. Payment to workers cannot be made in time as a result industrial peace may be disturbed. There will be low profitability in business due to improper trading. 3.2. Payment to creditors cannot be made in time effecting credit worthiness of the enterprises. Therefore. Conclusion Working capital management means deciding the quantum and composition of current assets and current liabilities. 6. stock. Management of current liabilities becomes difficult as they are controlled by outside factors. debtors. The opportunities for expansion appear to be slim. cash. A stable dividend policy cannot be maintained. Because working capital of a concern determines or efforts profitability of the concern.

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