Management Of Working Capital
Working capital is defined as that part of the capital, which is invested in the working of current assets like stock of raw materials, semi-finished goods, sundry debtors, bills receivables etc. This capital is also known as circulating capital or revolving capital.
Working capital is also required for payment of wages and salaries, overhead expenses like power, rent, taxes, repairing and up to date maintenance of machinery etc.
Raising Working Capital
Working capital requirements of a unit are met by internal as well as external sources. The major external source is the banking system. Banks offer various types of credit facilities for meeting the financial requirements of their customers. Their approach is normally flexible particularly towards the small-scale sector.
Credit facilities are granted by banks against the inventory holdings, book debts and bills receivables, for export oriented units by way of export finance (pre-shipment credit and post-shipment credit) etc. Certain contingent facilities like issuing letters of credit and guarantees are also offered by them.
We have already taken a loan to meet our immediate working capital needs. This loan is taken from Canara Bank under the Open Cash Credit Scheme. But as soon as we start earning returns on the business, this will be ploughed back so as to reduce the loan amount.
Classification Of Working Capital
1. Regular Working Capital - It meets continuous day-to-day business needs of the firm. It is invested and reinvested in the business called as fixed or regular working capital.
2. Variable Working Capital - It is not regular, not static and is required to meet the requirements of a rise in the total quantity of goods purchased during certain seasons in the year. This additional capital is called variable or seasonal working capital.
3. Special Working Capital - It is needed on special occasions viz. increasing prices of raw materials, business recession, strike, failure of the machinery, fire, etc. Special working capital is needed to finance the firm on such occasions.
Working capital is often classified as gross working capital and net working capital. The former refers to the total of all the current assets and the latter is the difference between total current assets and total current liabilities.
Ongoing review of gross working capital is essential for efficient management of current assets. However, with a long-term view, we have to concentrate on net working capital.
Changes in the net working capital can be measured in terms of value as also in percentages by comparing current assets, current liabilities and working capital over a given period. This involves the basic approach to working capital analysis.
Deployment Of Working Capital
This is best explained by what is called the operating cycle as given below:
Stage 1: Cash
Stage 2: Raw Materials
Stage 3: Stock-In-Progress
Stage 4: Finished Goods
Stage 5: Sundry Debtors
Any manufacturing organization is characterized by a cycle of operations consisting of purchase of raw materials, converting the raw materials into finished goods and realizing cash.
This operating cycle, also called the cash to cash cycle, indicates how cash is converted into raw materials, work-in-progress, finished goods, bills and finally back to cash. Working capital is the total cash that is circulating in this cycle. It also becomes clear that working capital be turned over, or refused after completing the cycle.
Essentially, management of working capital will mean, apart from finding out the source of meeting capital requirements by reducing the cycle time, optimum results.
The following factors are pertinent for having an over-all view of the forces affecting working capital needs:
1. Nature Of Business
2. Production Policies
3. Manufacturing Process
4. Growth And Expansion Of Business
5. Business Cycle Fluctuations
6. Terms Of Purchase And Sales
7. Withdrawals By Promoters, Etc.
Working capital is defined as that part of the capital, which is invested in the working of current assets like stock of raw materials, semi-finished goods, sundry debtors, bills receivables etc. This capital is also known as circulating capital or revolving capital.
Working capital is also required for payment of wages and salaries, overhead expenses like power, rent, taxes, repairing and up to date maintenance of machinery etc.
Raising Working Capital
Working capital requirements of a unit are met by internal as well as external sources. The major external source is the banking system. Banks offer various types of credit facilities for meeting the financial requirements of their customers. Their approach is normally flexible particularly towards the small-scale sector.
Credit facilities are granted by banks against the inventory holdings, book debts and bills receivables, for export oriented units by way of export finance (pre-shipment credit and post-shipment credit) etc. Certain contingent facilities like issuing letters of credit and guarantees are also offered by them.
We have already taken a loan to meet our immediate working capital needs. This loan is taken from Canara Bank under the Open Cash Credit Scheme. But as soon as we start earning returns on the business, this will be ploughed back so as to reduce the loan amount.
Classification Of Working Capital
1. Regular Working Capital - It meets continuous day-to-day business needs of the firm. It is invested and reinvested in the business called as fixed or regular working capital.
2. Variable Working Capital - It is not regular, not static and is required to meet the requirements of a rise in the total quantity of goods purchased during certain seasons in the year. This additional capital is called variable or seasonal working capital.
3. Special Working Capital - It is needed on special occasions viz. increasing prices of raw materials, business recession, strike, failure of the machinery, fire, etc. Special working capital is needed to finance the firm on such occasions.
Working capital is often classified as gross working capital and net working capital. The former refers to the total of all the current assets and the latter is the difference between total current assets and total current liabilities.
Ongoing review of gross working capital is essential for efficient management of current assets. However, with a long-term view, we have to concentrate on net working capital.
Changes in the net working capital can be measured in terms of value as also in percentages by comparing current assets, current liabilities and working capital over a given period. This involves the basic approach to working capital analysis.
Deployment Of Working Capital
This is best explained by what is called the operating cycle as given below:
Stage 1: Cash
Stage 2: Raw Materials
Stage 3: Stock-In-Progress
Stage 4: Finished Goods
Stage 5: Sundry Debtors
Any manufacturing organization is characterized by a cycle of operations consisting of purchase of raw materials, converting the raw materials into finished goods and realizing cash.
This operating cycle, also called the cash to cash cycle, indicates how cash is converted into raw materials, work-in-progress, finished goods, bills and finally back to cash. Working capital is the total cash that is circulating in this cycle. It also becomes clear that working capital be turned over, or refused after completing the cycle.
Essentially, management of working capital will mean, apart from finding out the source of meeting capital requirements by reducing the cycle time, optimum results.
The following factors are pertinent for having an over-all view of the forces affecting working capital needs:
1. Nature Of Business
2. Production Policies
3. Manufacturing Process
4. Growth And Expansion Of Business
5. Business Cycle Fluctuations
6. Terms Of Purchase And Sales
7. Withdrawals By Promoters, Etc.