The working capital is the amount revolving capital to meet the day today requirements of the firm. The other facets of the working capital is circulating capital, floating capital and moving capital which are required to meet the immediate requirements of the firm. The "working capital" means the funds available for day today operations of the enterprise. It also represents the excess of current assets over the current liabilities which include the short-term loans. Accounting standards Board, The institute of Chartered Accountant of India note the ASB has used the term “working capital” and not “Net working capital”.
Estimating the working capital requirements
The working capital requirements are normally estimated to the tune of production policies, nature of the business, length of manufacturing process, credit policy and so on. Sources of the working capital: The requirement of the working capital should be met with the help of long term and shot term resources. The permanent and temporary working capital requirements should be met out of long term and short term financial resource respectively.
The approaches of the working capital are classified into two categories viz the hedging
approach and conservative approach:
The hedging approach: Under this approach, the maturity of the financial resources
are matched with the nature of assets to be financed. Permanent working capital are financed by the long-term financial resources and the seasonal working capital requirements are met out through short term financial resources.
The conservative approach: Acc to this approach, all requirement of the funds should met
out long-term sources. The short-term resources should be only for emergency requirements.
Following are the major determinants of the working capital:
General nature of Business: The nature of the business should be considered for the
determination of working capital only to the tune of i) cash nature of business ii) sale of
services rather than commodities:
These are things considered only on the basis of stock , book volume of debts and so on.
Production cycle: The need of the working capital is determined on the basis of duration
of the production cycle. The time duration taken by the manufacturing process should be
considered from the stage of raw materials to the stage of finished goods. If the duration
is lengthier may require the firm to keep more amount of working capital to meet out the
requirements and vice versa.
Business cycle: The cycle of the business should be relatively considered for the need
of working capital. The upswing of the business cycle requires the business venture to
invest more amount of working capital due more volume of sales, results out of huge
volume of stock, book debts and so on. During the downswing of the business require
the business to have only lesser volume of working capital due lesser volume of business
and so on.
Production policy: The working capital requirement is determined on the basis of
production policy of the firm. Normally the production policy of the firm is classified on
the basis of two methodologies:
(i) The firm produces the goods then and there to the tune of immediate needs of the
market. This may require the firm to meet adversities due to lack of working capital
to meet out, due to in adequate planning. During the peak season, it requires
enormous working capital which may disturb working conditions of the business
(ii) The steady production policy by considering the futuristic demands, which will not
disturb the long-term prospects of the business venture due to effective planning.
Credit policy: The credit policy of the firm is another determinant for the determination
of the working capital. There are two different credit policies viz liberal and stringent
credit policies
(i) Liberal credit policy: The liberal credit policy may lead to have greater volume of
book debts, greater credit period, huge amount required for the built of stock; require
the firm to have greater amount of working capital
(ii) Stringent credit policy: Would not require that much of working capital like the
earlier segment.
Growth and Expansion: The growth and expansion prospects of the firm should be appropriately determined in order to identify the volume of working capital required during the future, unless otherwise that will badly affect the future development of the firm. Acute shortage of the raw materials supply: If the shortage of raw materials is acute, the firm is required to keep sufficient volume of working capital to have smooth flow of production process without any interruptions. In such cases the firm should have additional volume of working capital not only to avoid interruptions during the production process
due lack of supply of raw materials, but also to enjoy greater trade discounts during the Working Capital Management
bulk purchase in order to bring down the purchase cost of the raw materials.
Net profit: It is one of the major sources of working capital and practically speaking it is
one of the sources of cash from operations. To maintain the liquidity, the net profit
earning capacity should be maintained forever.
Dividend policy: The cash dividend payment leads to greater amount of cash outflows
which are more essential to the value of the firm to be maintained. The value of the firm
could also be alternately maintained by either through the declaration of bond dividend or
stock dividend or property dividend. The later specified methodologies facilitate the firm
to postpone the cash out flow which normally evade the immediate cash requirement.
Depreciation policy: The depreciation policy of the firm not only facilitates to bring
down the taxable liability but also brings down the profit which enhances the liquidity of
the firm on the other side.
Price level changes: The price level changes require the firm to keep more amount of
working capital to go hand in hand with the price changes which normally affect the
firm's liquidity position. During the periods of inflation, the firm is required to anticipate
the price level changes which drastically affect the working capital position of the firm.
The working capital has to be adequately managed by the firm , neither more nor less than its requirement to meet out the needs. If the working capital is more than the requirement means that the firm is expected to unnecessarily keep short-term assets idle in state and vice versa. The maintaining of the working capital management is mainly depending upon three major influences of the organizations
i) Profitability
ii) Liquidity and
iii) Structural health of the organisation
Why the study of Management of working capital is required ?
If the working capital is less than the requirement means that the volume of current assets are inadequate to meet the short term obligations of the firm on time, which may lead to disrepute the name and fame of the organisation. Contradictorily to the above, if the firm keeps more working capital that means more volume of current assets are maintained in the investment structure to meet out the short term obligations of the firm which poses more liquidity but on the other hand it hurdles the righteous opportunity to invest in the fixed assets to earn more income. The excessive volume of current assets drastically affects the profitability of the firm due to excess liquidity out of more amount of current assets.
As a firm should always maintain the righteous volume of working capital not only to
maintain the liquidity of the firm but also to earn adequately from the investment volume
of fixed assets.
The working capital management policies are studied in the following context viz
i) Concerned with profitability, liquidity and risk of the firm
ii) Concerned with the composition of the current assets
iii) Concerned with the composition of the current liabilities
There are two major types of working capital policies
Conservative policy of working capital:
Under this policy, the firm minimizes risk by maintaining a higher level of current assets
in meeting the liquidity of the firm.

No comments:

Post a Comment