Skip to main content

WORKING CAPITAL

Working Capital which is defined as all the short term assets used in daily operations. Net Working Capital may be defined as the difference between current assets and current liabilities. working capital management is the functional area of finance that covers all the current accounts of the firm.

Working Capital comprises of two components:

  • Permanent Working Capital
  • Variable Working Capital   
Goals of Working Capital Policies
  • Adequate Liquidity
  • Minimization of Risk
  • Contribute to Maximizing Firm's Value

Factors affecting the Need for Working Capital
  1. Sales Volume
  2. Seasonal and Cyclical Factors
  3. Changes to Technology
  4. Policies of the firm 
Managing Working Capital
It involves two processes:
  • Forecasting Needed Funds
  • Acquiring Funds
Managing Working Capital requires the following actions:
  • Monitoring Levels of Cash, Receivables and Inventory
  • Knowing percentage of funds in Current Accounts
  • Recording time spent managing Current Accounts
How much working capital is needed?
This depends on the following factors:
  1. Size of the Firm
  2. Activities of Firm
  3. Availability of Credit
  4. Attitude towards Profits
  5. Attitude towards Risk
The primary Goal of Working Capital Management is to avoid the risks from inadequate liquidity.
Labels:

Comments

Post a Comment

Popular posts from this blog

RISK in Investments

Investment decisions are a trade off between Risk and Return. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. Most investors are concerned about the actual outcome being less than the expected outcome. The wider the range of possible outcomes,the greater the risk. SOURCES OF RISK The three major sources of risk are: Business Risk Interest Rate Risk Market Risk   Business Risk As a holder of corporate securities (equity shares and debentures) you are exposed to risk of poor business performance. This may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products , shifts in consumer preferences, inadequate supply of essential inputs,changes in governmental policies and so on. The principal reason might be inept and incompetent management. Interest Rate Risk The changes in interest rate have a bearing  on the welfare of investo...
Post a Comment
Read more

Financial Glossary 1

Financial Resources Resources which have a monetary value Financial Management is planning, organizing and controlling the acquisition and use of financial resources for the purposes of achieving organisational goals. Financing is the process of determining the appropriate forms and sources of finance Financing strategy is the determination of the type of finance used to purchase assets, and the resulting mix between equity, short term debt and long term debt Investment is the use of finance to acquire an asset which will yield a required return Investment strategy is the determination of the appropriate mix of a business's assets Asset Item of value which is owned by an organisation Accounts receivable (Short term/ current asset) - customer who owes the business money for buying goods/services on credit Inventory stock - Items manufactured or purchased by the business for sale to the customers Financial Intermedia...
Post a Comment
Read more

A note on Motivation

Motivation Theories Motivation- those factors that cause ,channel, and sustain people’s behavior. Motivation is not always easy to discern. Most successful managers ,however, have learned by experience that people are generally very responsive to praise and encouragement-expressed not only in words but also in actions and need to feel successful in their work to give their best effort to the organization. Different View points on Motivation The Traditional Model The traditional model of motivation is associated with Fredrick Taylor and scientific management which held that an important aspect of the manager’s job was to make sure that workers perform repetitive  tasks in the most efficient way. The Human Relations Model In the human relations model, workers were expected to accept management’s authority because supervisors treated them with consideration and were attentive to their needs. The intent of managers ,however remained the same- to have the workers acc...
Post a Comment
Read more