What Is the concept of WC management?

Working capital is a measurement of an entity s current assets, after subtracting

its liabilities. Sometimes referred to as operating capital, it is a valuation o
f the amount of liquidity a business or organization has for the running and bui
lding of the business. Generally speaking, companies with higher amounts of work
ing capital are better positioned for success. They have the liquid assets neede
d to expand their business operations as desired.
Sometimes, a company will have a large amount of assets, but have very little wi
th which to build the business and improve processes. Even a profitable company
may have this problem. This can occur when a company has assets that are not eas
y to convert into cash.
Working capital can be expressed as a positive or negative number. When a compan
y has more debts than current assets, it has negative working capital. When curr
ent assets outweigh debts, a company has positive working capital.
Changes in working capital will impact a business cash flow. When working capital
increases, the effect on cash flow is negative. This is often caused by the liq
uidation of inventory or the drawing of money from accounts that are due to be p
aid by the business. On the other hand, a decrease in working capital translates
into less money to settle short-term debts.
Working capital is among the many important things that contribute to the succes
s of a business. Without it, a business may cease to function properly or at all
. Not only does a lack of working capital render a company unable to build and g
row, but it may also leave a company with too little cash to pay its short-term
obligations. Simply put, a company with a very low amount of working capital may
be at risk of running out of money.
When a company has too little working capital, it can face financial difficultie
s and may even be forced toward bankruptcy. This is true of both very small comp
anies and billion-dollar organizations. A company with this problem may pay cred
itors late or even skip payments. It may borrow money in an attempt to remain af
loat. If late payments have affected the company s credit rating, it may have diff
iculty obtaining a loan at an affordable interest rate.
In some types of businesses, it isn t as much of a problem to have a lower amount
of working capital. Companies that are operated on as cash basis, have fast inve
ntory turnovers, and can generate cash quickly don t necessarily need as much work
ing capital. For example, a grocery store might meet these requirements and do w
ell with less working capital.
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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
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How Is WC Affected by
A) Nature of Business: The working capital requirement of a firm depends on the
nature of the business. For example, a firm involved in sale of services rather
than manufacturing or a firm is allowing only cash sales. In the first instance,
no investment is required in either raw materials or WIP or finished goods, whi
le in the second instance there exists no receivables as there is immediate real
ization of cash. Hence the requirement of working capital will be lower.
B) Process Technology Used
In case the Raw Material has to go through several stages during the process of
production, the Work-in-Progress Inventory is likely to be much higher than any
other item of the Current Assets thereby increasing the need of Working Capital
.
C)Manufacturing Policy
The quantum of working capital is also determined by production policy. In case
of the firms having seasonal demand of the products like refrigerators, air cool
ers etc., The production policy of the firm determines the amount of working cap
ital requirement. If the firm has production policy to carry production at a ste
ady level to meet the peak demand, this will result in a large accumulation of f
inished goods (inventories) during the off-seasons and the abrupt sale during th
e peak season. The progressive accumulation of finished goods will naturally req
uire an increasing amount of working capital. If the firm has production policy
to produce only when there is a demand then the firm needs low working capital d
uring the slack season and high working capital during season.
D) Price Level Changes:
The financial manager should also anticipate the effect of price level changes o
n working capital requirements of the firm. Generally, rising price levels will
require higher amount of working capital since to maintain the same level of cur
rent assets, higher investment will be required. The effects of rising price lev
els will be different for different firms depending upon their price policies, n
ature of the product, ability to pass on the increase to the customer, etc.
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Q2) What is receivables management? Explain Its cost and benefits influencing th
e management of receivables.