Working capital introduction

Working capital Introduction

•           Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities.

•           These items are also referred to as circulating capital

Corporate executives devote a considerable amount of attention to the management of working capital

Definition of Working Capital

Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories.   Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets.   Working Capital is also known as revolving or circulating capital or short-term capital.

Working capital investment

•           The size and nature of investment in current assets is a function of different factors such as type of products manufactured, the length of operating cycle, the sales level, inventory policies, unexpected demand and unanticipated delays in obtaining new inventories, credit policies and current assets.

FACTORS DETERMINING WORKING CAPITAL

1.     Nature of the Industry
2.     Demand of Industry
3.     Cash requirements
4.     Nature of the Business
5.     Manufacturing time
6.     Volume of Sales
7.     Terms of Purchase and Sales
8.     Inventory Turnover
9.     Business Turnover
10.    Business Cycle
11.    Current Assets requirements
12.    Production Cycle

13.     Credit control
14.     Inflation or Price level changes
15.     Profit planning and control
16.     Repayment ability
17.     Cash reserves
18.     Operation efficiency
19.     Change in Technology
20.     Firm’s finance and dividend policy
21.     Attitude towards Risk

MANAGEMENT OF CASH

1. Importance of Cash

                When planning the short or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc.          

                Bear in mind that more businesses fail for lack of cash than for want of profit.

2. Cash vs Profit

v   Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows.

v   The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall.

v      For this reason it is essential to forecast cash flows as well as project likely profits.