A study on working capital management
- Working capital management
- Theoretical frame work
- Concepts of working capital
- Types of working capital
- Working capital cycle
- Importance of working capital
- Disadvantages of excessive working capital
- Disadvantages of inadequate working capital
- Approaches to working capital
- Management of accounts receivables
- Management of inventory
- Raw materials
- Finished goods
- Types of inventories
- Ratio analysis
- Types of ratios
Cash is the lifeline of a company, no matter how large or small the organization is. If this lifeline deteriorates so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital Management.
Working capital management involves the relationship between a firm's current assets and its current liabilities. Current Assets are resources, which are in cash or will soon be converted into cash in "the ordinary course of business". Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business".
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. The management of working capital involves managing inventories, accounts receivable and payable, and cash to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level.
[...] The cost on the use of additional capital to support, credit sales, which apparently could be profitably employed else where, are therefore a part of the cost of extending credit or receivables DELINQUENCY COST This is the cost, which arises out of the failure of the customer to meet their obligations when payment on credit sales becomes due after the expiry of the period of credit DEFAULT COST Sometimes the firm may not be in a position to recover the dues because of the inability of the customers, such debts are treated as bad debts and are written off as they cannot be realized, and such costs are known as default costs associated with credit sales and accounts receivables. [...]
[...] The amount of raw materials to be kept by a firm expends on a number of factors, including the speed with which raw materials can be ordered and procured and uncertainly in the supply of these raw materials. Its purpose is to uncouple the production function from the purchasing function i.e., to make these two functions independent of each other so that delays and the firm can satisfy its need for raw materials out of the inventory lying in the stores. [...]
[...] INVENTORY TURN OVER RATIO DEBTORS TURNOVER RATIO CREDITORS TURNOVER RATIO WORKING CAPITAL TURNOVER RATIO INVENTORY TURNOVER RATIO: It is computed by dividing the cost of goods sold by the average inventory. COST OF GOODS SOLD INVENTORY TURN OVER RATIO = AVGERAGE INVENTORY WHERE Cost of goods sold = opening stock + purchases - closing stock Average Inventory = (opening stock + closing stock) / 2 (Note if average inventory is not available we can take closing stock) This ratio indicates how fast inventory [...]