WORKING CAPITAL MANAGEMENT

Introduction:
Working capital is the life blood and nerve centre of a business. Just as
circulation of blood is essential in the human body for maintaining life, working
capital is very essential to maintain the smooth running of a business. No
business can run successfully with out an adequate amount of working capital.

Working capital refers to that part of firm’s capital which is required for
financing short term or current assets such as cash, marketable securities,
debtors, and inventories. In other words working capital is the amount of
funds necessary to cover the cost of operating the enterprise.

Meaning:

Working capital means the funds (i.e.; capital) available and used for day to
day operations (i.e.; working) of an enterprise. It consists broadly of that
portion of assets of a business which are used in or related to its current
operations. It refers to funds which are used during an accounting period to
generate a current income of a type which is consistent with major purpose of
a firm existence.

Objectives of working capital:

Every business needs some amount of working capital. It is needed for

following purposes-

• For the purchase of raw materials, components and spares.

• To pay wages and salaries.
• To incur day to day expenses and overhead costs such as fuel, power, and
office expenses etc.
• To provide credit facilities to customers etc.

Factors that determine working capital:

The working capital requirement of a concern depend upon a large number of

factors such as
? Size of business
? Nature of character of business.
? Seasonal variations working capital cycle
? Operating efficiency
? Profit level.
? Other factors.

Sources of working capital:

The working capital requirements should be met both from short term as well
as long term sources of funds.

? Financing of working capital through short term sources of funds has the
benefits of lower cost and establishing close relationship with banks.
 ? Financing of working capital through long term sources provides the benefits
of reduces risk and increases liquidity

Ratios
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Per share ratios
Adjusted EPS (Rs) 18.42 10.15 5.16 3.39 3.45
Adjusted cash EPS (Rs) 19.77 11.67 6.03 4.15 3.99
Reported EPS (Rs) 18.42 10.15 5.16 3.95 2.46
Reported cash EPS (Rs) 19.78 11.67 6.03 4.71 3.00
Dividend per share 1.50 1.00 1.00 1.00 -
Operating profit per share (Rs) 17.01 12.04 3.08 3.65 4.73
Book value (excl rev res) per share (Rs) 65.74 50.88 31.08 27.66 0.31
Book value (incl rev res) per share (Rs.) 73.91 59.29 36.61 33.30 0.32
Net operating income per share (Rs) 182.04 159.93 85.98 66.77 55.06
Free reserves per share (Rs) 32.56 22.63 13.00 10.56 9.07
Profitability ratios
Operating margin (%) 9.34 7.52 3.57 5.46 8.59
Gross profit margin (%) 8.60 6.57 2.56 4.32 7.62
Net profit margin (%) 9.72 6.10 5.75 5.68 4.29
Adjusted cash margin (%) 10.44 7.01 6.72 5.96 6.96
Adjusted return on net worth (%) 28.02 19.95 16.58 12.25 13.87
Reported return on net worth (%) 28.02 19.95 16.58 14.29 9.89
Return on long term funds (%) 178.21 203.74 220.99 178.02 154.91
Leverage ratios
Long term debt / Equity 0.31 0.25 - - -
Total debt/equity 34.21 36.11 32.16 29.33 27.45
Owners fund as % of total source 2.83 2.69 3.01 3.29 3.51
Fixed assets turnover ratio 7.14 6.56 5.67 4.78 4.46
Liquidity ratios
Current ratio 0.72 0.35 0.31 0.30 0.25
Current ratio (inc. st loans) 0.01 0.01 0.01 0.02 0.01
Quick ratio 26.89 14.25 11.91 10.72 11.57
Inventory turnover ratio - - - - -
Payout ratios
Dividend payout ratio (net profit) 14.68 12.63 22.69 28.83 -
Dividend payout ratio (cash profit) 13.68 10.98 19.40 24.19 -
Earning retention ratio 85.32 87.37 77.31 66.37 100.00
Cash earnings retention ratio 86.32 89.02 80.60 72.52 100.00
Coverage ratios
 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Adjusted cash flow time total debt 112.69 156.29 165.80 195.61 171.12
Financial charges coverage ratio 1.19 1.16 1.11 1.14 1.20
Fin. charges cov.ratio (post tax) 1.15 1.10 1.10 1.10 1.09
Component ratios
Material cost component (% earnings) - - - - -
Selling cost Component 0.18 0.21 0.16 0.23 0.19
Exports as percent of total sales - - - - -
Import comp. in raw mat. consumed - - - - -
Long term assets / total Assets 0.94 0.93 0.93 0.93 0.95
Bonus component in equity capital (%) - - - - -

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Types of working capital:

Working capital an be divided into two categories-

Permanent working capital:

It refers to that minimum amount of investment in all current assets which is required at all

times to carry out minimum level of business activities.

Temporary working capital:

The amount of such working capital keeps on fluctuating from time to time on the basis of

business activities.

Advantages of working capital:

• It helps the business concern in maintaining the goodwill.

• It can arrange loans from banks and others on easy and favorable terms.

• It enables a concern to face business crisis in emergencies such as depression.

• It creates an environment of security, confidence, and over all efficiency in a business.

• It helps in maintaining solvency of the business.

Disadvantages of working capital:

• Rate of return on investments also fall with the shortage of working capital.

• Excess working capital may result into over all inefficiency in organization.

• Excess working capital means idle funds which earn no profits.

• Inadequate working capital can not pay its short term liabilities in time.
Management of working capital:

A firm must have adequate working capital, i.e.; as much as needed the firm. It should be

neither excessive nor inadequate. Both situations are dangerous. Excessive working capital

means the firm has idle funds which earn no profits for the firm. Inadequate working capital

means the firm does not have sufficient funds for running its operations. It will be interesting

to understand the relationship between working capital, risk and return. The basic objective of

working capital management is to manage firms current assets and current liabilities in such a

way that the satisfactory level of working capital is maintained, i.e.; neither inadequate nor

excessive. Working capital some times is referred to as “circulating capital”. Operating cycle

can be said to be t the heart of the need for working capital. The flow begins with conversion

of cash into raw materials which are, in turn transformed into work-in-progress and then to

finished goods. With the sale finished goods turn into accounts receivable, presuming goods

are sold as credit. Collection of receivables brings back the cycle to cash.

The company has been effective in carrying working capital cycle with low working capital

limits. It may also be observed that the PBT in absolute terms has been increasing as a year

to year basis as could be seen from the above table although profit percentage turnover may

be lower but in absolute terms it is increasing. In order to further increase profit margins, SSL

can increase their margins by extending credit to good customers and also by paying the

creditors in advance to get better rates.

WORKING CAPITAL AND RATIO ANALYSIS

Ratio Analysis is one of the important techniques that can be used to check the efficiency with

which working capital is being managed by a firm. The most important ratios for working

capital management are as follows

Net Working Capital:

There are two concepts of working capital namely gross working capital and net working

capital. Net working capital is the difference between current assets and current liabilities. An

analysis of the net working capital will be very help full for knowing the operational efficiency

of the company. The following table provides the data relating to the net working capital of

SSL.

NET WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIS

YEAR CURRENT ASSETS CURRENT LIABILITIES NET WORKING CAPITAL

2005 246755108 184541063 62214045

2006 289394416 169342603 120051813

2007 337982290 187602877 150379413

2008 36344554 217973661 145471893

Graph

INFERENCE:

From the above table it can be inferred that the proportion of net working capital had

increased from the year 2005 to2007 and decreed in the year 2008 compare with 2007.
Working capital turnover ratio:

This is also known as sales to working capital ratio and usually represented in times. This

establishes the relationship of sales to net working capital. This ratio indicates -heather or not

working capital has been effectively utilized in making sales. In case if a company can achieve

higher volume of sales with relatively small amount of working capital, it is an indication of the

operating efficiency of the company. It is calculated as follows-

YEAR NET SALES(RS) WORKING CAPITAL(RS) RATIO

2005 429128296 62214045 6.89

2006 622181610 120051813 5.2

2007 668215791 150379413 4.4

2008 655229319 145471893 4.5

INTERPRETATION:

From the above table we can conclude that working capital ratio is decreasing. In the year

2005 it is 6.89 times it decreased to 4.4 times in the year 2007. And it is increasing 4.5 times

in the year 2008.

CURRENT ASSETS TO TOTAL ASSETS RATIO:

Current assets play an important role in day-to-day functioning of an organization. So, every

firm should maintain adequate current assets so as to meet the daily requirements of

business. If the proportion of current assets in total assets exceeds then the required limit,

there will be some idle investments on such assets. At the time, the proportion of current

assets in total should not less than requirements. So, every firm should maintain the adequate

quantity of current assets. But during the situations of peak demand, should employ more

current assets and vice-versa. Particularly in case of production organizations, there is heavy

importance to the current assets than fixed assets. This kind of analysis will enable the

managers to understand the working capital position of the firm. Data relating to the

proportion of working capital in total assets is depicted as follows-

This ratio establishes the relationship between the current assets and total assets.

YEAR CURRENT ASSETS(RS) TOTAL ASSETS(RS) RATIO

2005 217973661 390012770 55.88

2006 187602877 327640705 57.25

2007 169342603 475995664 35.57

2008 184541063 491935181 37.51

INFERENCE:

From the above table it can be inferred that the proportion of current assets to total assets

had decreased 55.88 in the year 2005. In the year 2005 it had increased to 57.25, again in

the year 2007 it has decreased 35.57%, again in the year 2008 increase in 37.51

Current assets to sales ratio:

The current assets are used for the purpose of generating sales. A ratio of current assets to

sales reveals that how best the assets are applied in business for turnover. As per the above

said ratio, a low proportion of current assets in relation to sales indicates better turnover of

the company and vice-versa, which will show positive impact on profitability. The data relating

to this aspect is provided as follows and it is calculated as follows.

YEAR CURRENT ASSETS(RS) NET SALES(RS) RATIO

2005 246755108 429128296 57.5

2006 289394416 622181610 46.5

2007 337982290 668215791 50.5

2008 363445554 655229319 55.4

INFERENCE:

From the above table it can be inferred that the proportion of current assets to sales had

increased to 57.5% in the year 2005. In the year 2006 it had decreased 46.5%. In the years

2007 it had increased to 50.5% and in the year 2008 had increased 55.4%.

Current assets to fixed assets ratio:

Total assets in any business contain both fixed and current assets. For properly functioning of

the organization in terms of production and marketing it is necessary to maintain a properly

balance between them. If the proportion of fixed assets increases, it will be a negative impact

on the firm’s liquidity and if current assets increase, production increases and which causes

impact on the demand for the product. In view of effective management of funds and to invest

on both fixed and current assets, it is necessary to take the decision as soon as possible. Data

relating to the ratio between current assets to fixed assets is depicted as follows.

YEAR CURRENT ASSETS(RS) FIXED ASSETS(RS) RATIO

2005 246755108 167454219 14.13

2006 289394416 184597059 15.67

2007 337982290 138013376 24.4

2008 363445554 202084725 18.0

INFERENCE:

From the above table it can be inferred that the proportion of current assets to fixed assets

had decreased 14.13% in the year 2005. In the year 2006 it had increased to 15.67%. In the

year 2007 it had increased 24.4%it had decrease in year 2008 in 18.0%.

RATIO ANALYSIS

INTRODUCTION:

Ratio Analysis is a powerful tool o financial analysis. Alexander Hall first presented it in 1991 in

Federal Reserve Bulletin. Ratio Analysis is a process of comparison of one figure against other,

which makes a ratio and the appraisal of the ratios of the ratios to make proper analysis about

the strengths and weakness of the firm’s operations. The term ratio refers to the numerical or

quantitative relationship between two accounting figures. Ratio analysis of financial

statements stands for the process of determining and presenting the relationship of items and

group of items in the statements.

Ratio analysis can be used both in trend analysis and static analysis. A creditor would like to

know the ability of the company, to meet its current obligation and therefore would think of

current and liquidity ratio and trend of receivable.

Major tool of financial are thus ratio analysis and Funds Flow analysis.Financial analysis is the

process of identifying the financial strength and weakness of the firm by properly establishing

relationship between the items of the balance sheet and the profit account

The financial analyst may use ratio in two ways. First he may compare a present ratio with the

ratio of the past few years and project ratio of the next year or so. This will indicate the trend

in relation that particular financial aspect of the enterprise. Another method of using ratios for

financial analysis is to compare a financial ratio for the company with for industry as a whole,

or for other, the firm’s ability to meet its current obligation. It measures the firm’s liquidity.

The greater the ratio, the greater the firms liquidity and vice-versa.

A ratio can be defined as a numerical relationship between two numbers expressed in terms of

(a) proportion (b) rate (c) percentage. It is also define as a financial tool to determine an

interpret numerical relationship based on financial statement yardstick that provides a

measure of relation ship between two variable or figures.

Meaning and Importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of financial

condition, efficiency and profitability of business. Here ratio analysis id useful from following

objects.

1. Short term and long term planning

2. Measurement and evaluation of financial performance

3. Stud of financial trends

4. Decision making for investment and operations

5. Diagnosis of financial ills

6. providing valuable insight into firms financial position or picture

ADVANTAGES& DISADVANTAGES OF RATIO ANALYSIS

Advantages:

The following are the main advantages derived of ratio analysis, which are obtained from the

financial statement via Profit & Loss Account and Balance Sheet.

a) The analysis helps to grasp the relationship between various items in the financial

statements.

b) They are useful in pointing out the trends in important items and thus help the

management to forecast

c) With the help of ratios, inter firm comparison made to evolve future market strategies.

d) Out of ratio analysis standard ratios are computed and comparison of actual with standards

reveals the variances. This helps the management to take corrective action.

e) The communication of that has happened between two accounting the dates are revealed

effective action.

f) Simple assessments of liquidity, solvency profitability efficiency of the firm are indicted by

ratio analysis. Ratios meet comparisons much more valid.

Disadvantages:

Ratio analysis is to calculate and easy to understand and such statistical calculation

stimulation thinking and develop understanding.

But there are certain drawbacks and dangers they are.

i) There is a trendy to use to ratio analysis profusely.

ii) Accumulation of mass data obscured rather than clarifies relationship.

iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and product unit.(For

example :one firm may purchase the asset at lower price with a higher return and another

firm witch purchase the asset at asset at higher price will have a lower return)

2. Both the inter period and inter firm comparison are affected by price level changes. A
change in price level can affect the validity of ratios calculated for different time period.

3. Unless varies terms like group profit, operating profit, net profit, current asset, current

liability etc., are properly define, comparison between two variables become meaningless.

4. Ratios are simple to understand and easy to calculate. The analyst should not take decision

should not take decision on a single ratio. He has to take several ratios into consideration.

STANDARDS OF COMPARISION:

1. Ratios calculated from the past financial statements of the same firm.

2. Ratio developed using the projected or perform financial statement of the same firm

3. Ratios of some selected firm especially the most progressive and successful, at the same

point of time.

4. Ratios of the industry to which the firm belongs.

IMPORTANCE OF RATIO ANALYSIS

In the preceding discussion in the form, we have illustrated the compulsion and implication of

important ratios that can be calculated from the Balance Sheet and Profit & Loss account of a

firm. As a tool of financial management, they are of crucial significance. The importance of

ratio analysis lies in the fact and enables the drawing of inferences regarding the performance

of a firm. Ration analysis is a relevant in assessing the performance of a firm in respect of the

following aspect.
CAUSTION IN USING RATIOS:

1. It is difficult to decide on the proper bases of comparison.

2. The comparison rendered difficult because of difference in situation of two companies or of

one-company for different years.

3. The price level change make the interpretation of ratios invalid

4. The difference in the definition of items in the balance sheet and Profit & Loss statement

make the interpretation of ratios difficult.

5. The ratios calculated at a point of time are less informative and defective as they suffer

from sort term changes.

6. The ratios are generally calculated from the past financial statement and thus are no

indicators of future.

LIQUTDITY Vs PROFITABILITY

INTRODUCTION

Financial analysis is the process of identifying the financial strengths and weakness of the firm

by properly establishing relationship between the items of the balance sheet and profit loss

account. Management should particularly interest in knowing financial strengths and weakness

of the firm to make their best use and to be able to spot out financial weakness of the firm to

take a suitable corrective actions.

Financial analysis is the starting point of making plans, before using any sophisticated

forecasting and planning procedures.

Major tools of financial analysis are ratio analysis and funds flow analysis. Financial analysis is

the process of identifying the financial strengths and weakness of the firm by properly

establishing relationship between the items of the balance sheet and the profit and loss

account.

Meaning and importance

Ratio analysis is concerned to be one of the important financial tools for appraisal of financial

condition, efficiency and profitability of business. Here ratio analysis is useful from following

objectives.

1. Short term and long term planning.

2. Measurement and evaluation of financial performance.

3. Study of financial trends.

4. Decision making for investment and operations.

5. Diagnosis of financial ills.

6. Providing valuable insight into firm’s financial position or picture.

Ratios

1. Current Ratio

2. Quick Ratio

3. Absolute Quick Ratio

4. Net Profit Ratio

5. Debtors Turnover Ratio

6. Inventory Turnover Ratio

CURRENT RATIO

The current ratio is calculated by dividing current assets by current liabilities.

Current ratio = current assets/current liabilities

The current ratio is a measure of the firm’s short-term solvency. It indicates the availability of

current assets in rupees for every one rupee of current liabilities. A ratio of greater than one

means that the firm has more current assets than current liabilities claims against them. A

standard ratio between them is 2:1. The data relationship the current ratio of ANNAPURNA

EARCANAL LIMITED is depicted as follows:

YEAR CURRENT ASSETS CURRENT LIABILITIES Current Ratio (%)

2005 246755108 184541063 1.34

2006 289394416 169342603 1.71

2007 337982290 187602877 1.8

2008 363445554 217973661 1.67

Graph

Inference:

The standard norm for this ratio is 2:1 the empirical analysis of the data relating to the current

ratio of Annapurna Ear canal Ltd. Has decreased from 1.71 in the year 2006 to 1.8 in the year

2007

QUICK RATIO:

This ratio establishes a relationship between quick of liquid assets and current liabilities. It is

an absolute measure of liquidity management of the concern. An asset is liquid if it can be

converted in to cash immediately or reasonably soon without a loss of value, if ignores totally

the stocks. Because inventories normally require some time for realizing into cash: their value

also has a tendency to fluctuate. The standard quick ratio is 1:1.

Quick Ratio = Quick Assets/Current Liabilities

YEAR QUICK ASSETS CURRENT LIABILITIES QUICK RATIO(%)

2005 203744623 184541063 1.1

2006 243039010 169342603 1.4

2007 296815785 187602877 1.58

2008 323437711 217973661 1.48

QUICK RATIO GRAPH

Inference:

The standard norm for this ratio is 1:1, means for every 1 rupee of current liability, company

must have 1 rupee of quick assets.

The quick ratio of Annapurna earcanal ltd.1.1in 2005, 1.4 in 2006 and1.58 in 2007. It have

more than 1 rupee of quick assets for all 4years.

Absolute quick ratio:

Since cash is the most liquid assets necessary to examine the ratio of cash and its equivalent

to current liabilities. Trade investment or marketable securities are equivalent of cash.

Therefore, they may be included in the consumption of absolute quick ratio.

Absolute quick ratio = Absolute Quick Assets/Current Liabilities

YEAR CASH&EQUIVLENT CURRENT LIABILITIES ABSOLUTE QUICK RATIO

2005 4548328 184541063 0.024

2006 9272929 169342603 0.055

2007 16297869 187602877 0.087

2008 24336946 217973661 0.111

Absolute quick ratio graph

Inference:

The standard norms of absolute quick ratio is 0.5:1.From the above table the firm not

maintain the sufficient level of quick assets because of the day-to-day expenses .It is

fluctuating between

The standard norm for this ratio is 1:2 means for every 2 rupees of current Liabilities,

Company must have 1 rupee of cash and bank balance and marketable securities.
Net Profit Ratio:

As every business is to earn profit, this ratio is very important because it measures the

profitability of sales. A business may yield high gross income but low net income because of

increasing operating and non-operating expenses. This situation can easily be detected by

calculating this ratio.

The profits used for this purpose may be profits after/before tax. To obtain this ratio, the

figure of net profits after tax is divided by the figure of net profits after tax is divided by the

figure of sales the ratio is also known as sales margin as we can ascertain with its help the

margin which the sales leave later deducting all the expenses. The unit of expression is

percentage, as is the case with profitability ratios.

YEARS NET PROFIT NET SALES RATIO %

2005 70557286 429128286 1.64

2006 24851266 622181610 3.99

2007 22072724 668215791 3.31

2008 14235566 655229319 2.17

Graph

Inference:

Higher the ratio better is the profitability. From the table the ratio is declining from 2005 to
2006 is increase. Again decrease in the year 2008

Net Profit Ratio is not effective over the period of study. Company has not control over the

cost of goods sold, selling, administrative and distribution expenses.

So, effective steps are to be taken to increase the profits.

CASH MANAGEMENT

Introduction:

Cash management is one of the key areas of working capital management. Cash is the liquid

current asset. The main duty of the finance manager is to provide adequate cash to all

segments of the organization. The important reason for maintaining cash balances is the

transaction motive. A firm enters into variety of transactions to accomplish its objectives

which have to be paid for in the form of cash.

Meaning of cash:

The term “cash” with reference to cash management used in two senses. In a narrower sense

it includes coins, currency notes, cheques, bank drafts held by a firm. n a broader sense it also

includes “near-cash assets” such as marketable securities and time deposits with banks.
Objectives of cash management:

There are two basic objectives of cash management. They are-

? To meet the cash disbursement needs as per the payment schedule.

? To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash management involves the following four basic problems.

? Controlling level of cash

? Controlling inflows of cash

? Controlling outflows of cash and

? Optimum investment of surplus cash.

Determining safety level for cash:

The finance manager has to take into account the minimum cash balance that the firm must

keep to avoid risk or cost of running out of funds. Such minimum level may be termed as

“safety level of cash”. The finance manager determines the safety level of cash separately

both for normal periods and peak periods. Under both cases he decides about two basic

factors. They are-

Desired days of cash:

It means the number of days for which cash balance should be sufficient to cover payments.

Average daily cash flows:

This means average amount of disbursements which will have to be made daily.

Criteria for investment of surplus cash:

In most of the companies there are usually no formal written instructions for investing the

surplus cash. It is left to the discretion and judgment of the finance manager. While exercising

such judgment, he usually takes into consideration the following factors-

Security:

This can be ensured by investing money in securities whose price remains more or less stable.

Liquidity:

This can be ensured by investing money in short term securities including sha\ort term fixed

deposits with banks.

Yield:

Most corporate managers give less emphasis to yield as compared to security and liquidity of

investment. So they prefer short term government securities for investing surplus cash.

Maturity:

It will be advisable to select securities according to their maturities so the finance manager

can maximize the yield as well as maintain the liquidity of investments.

Cash Management in SSL:

The cash management is carried out in seaways by CTM (Corporate Treasury Management).

CTM is a commonly followed procedure in most of the companies.

Ratio Analysis is one of the important techniques that can be used to check the efficiency with

which cash management is being managed by a firm. The most important ratios for cash

management are as follows-

Cash to current assets ratio:

This ratio establishes the relationship between the cash and the current assets. It is calculated

as follows

YEAR CASH (RS) CURRENT ASSETS(RS) RATIO

2005 3460206 246755108 1.4

2006 8184807 289394416 2.82

2007 15209747 337982290 4.5

2008 23476324 363445554 6.45

Definition of Working Capital

" Working capital is an excess of current assets over current liabilities. In other words,

The amount of current assets which is more than current liabilities is known as Working

Capital. If current liabilities are nil then, working capital will equal to current assets.

Working capital shows strength of business in short period of time . If a company have

some amount in the form of working capital , it means Company have liquid assets, with

this money company can face every crises position in market. "

Formula of Calculating Working Capital

Working Capital = Current Assets - Current Liabilities

Current Assets

Current assets are those assets which can be converted into cash within One year or less

then one year . In current assets, we includes cash, bank, debtors, bill receivables,

prepaid expenses, outstanding incomes .

Current Liabilities

Current Liabilities are those liabilities which can be paid to respective parties within one

year or less than one year at their maturity. In current liabilities, we includes creditors,

outstanding bills, bank overdraft, bills payable and short term loans, outstanding

expenses, advance incomes .

Other names of Working Capital

Some Professional accountants know working capital as operating capital,

operating liquidity, positive working capital.

Important things about Working Capital

1. Working Capital can be negative. At that time, We add one word " deficiency" in the

back of working capital . It means if Current Liabilities are more than current assets, it is

known as working capital deficiency or inverse working capital or negative working

capital.

2. Working capital can be easily adjusted, if Accounts manager knows different

techniques of managing working capital . He can try to get short term loan or he can

increase working capital by proper management of inventory and outstanding incomes

and debtors .

3. Working capital can also change by Changing in Cash Conversion period. Cash

conversion period is a period in which company changes current assets into cash or bank.

4. Working capital can also positive by increasing growth rate of company. If company

does not invest more money and increase profit, the same amount will increase in the

cash position of company and with cash company can increase their working capital

position.

Importance of Working Capital

Some time, If creditors demands their money from company, at this time company's high

working capital saves company from this situation . You know that selling of current

assets are easy in small period of time but Company can not sell their fixed assets with in

small period of time. So, If Company have sufficient working capital , Company can easily

pay off the creditors and create his reputation in market . But If a company have zero

working capital and then company can not pay creditors in emergency time and either

company becomes bankrupt or takes loan at higher rate of Interest . In both condition , it

is very dangerous and always Company's Account Manager tries to keep some amount of

working capital for creating goodwill in market .

Positive working capital enables also to pay day to day expenses like wages, salaries,

overheads and other operating expenses. Because sufficient working capital can not only

pay maturity liabilities but also outstanding liabilities without any more delay.
One of advantages of positive working capital that Company can do every risky work

without any tension of self security.