Working Capital Management Essay

7081 words - 28 pages

Chapter-11.1) Introduction:Study on working capital management gives useful insights on how a company is managing its short term assets and liabilities. Current assets and liabilities are collectively known as working capital. Working capital management is concerned with how a company balances its current assets and current liabilities to manage its short term liquidity funds. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. If the current assets are more than the current liabilities then the net working capital is positive. There are four principal types of current asset they are 1) Accounts receivables, 2) Inventory management, 3) Cash management and 4) Marketable securities.1) Credit management: As companies frequently sell goods on credit, it may be weeks or even months before the companies are paid. These unpaid bills are shown in the account as receivables. In credit management the critical aspects are maximizing profit i.e. manager should focus on minimizing the bad accounts rather than maximizing the expected profit, concentrating on the dangerous accounts.2) Inventory management: Inventory may consist of raw material, work in progress or finished goods awaiting sale and shipment. Money tied up in inventories does not earn interest; storage and insurance must be paid for; and there may be a risk of spillage or obsolescence. Therefore production manager need to strike a sensible balance between the benefits of holding inventory and the costs.3) Cash management: Short term securities pay interest; cash doesn't but corporations hold cash as it gives more liquidity than do securities. Most of the firms hold significant amount of cash basically two reasons. First, Cash may be left in non-interest bearing accounts to compensate banks for the services they provide. Secondly, to monitor each account daily and make daily transfer among them.4) Marketable securities: Marketable securities are very liquid as they tend to have maturities of less than one year. Furthermore, the rate at which these securities can be bought or sold has little effect on their prices.Current liabilities are those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earning of the concern. The basic current liabilities are account payable, bills payable, bank over-draft and outstanding expense.The goal of working capital management is to manage the firm's current assets and current liabilities in such a way that the satisfactory level of working capital is mentioned. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.For better profits:The importance of the management of working capital can be judged from the following factsThere is a...

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