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ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017

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ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in Management of Working Capital Mrs. Sunita Dixit, Ms. Pooja Dubey Bundelkhand University, Jhansi U.P. Abstract The uses of funds of a concern can be divided into business firm. Working capital may be defined by two parts namely long-term funds and short-term various authors as follows: funds. The long – term investment may be termed as ‘fixed investment.’ A major part of the long-term 1. According to Weston & Brigham - “Working funds is invested in the fixed assets. These fixed capital refers to a firm’s investment in short term assets are retained in the business to earn profits assets, such as cash amounts receivables, during the life of the fixed assets. To run the inventories etc. business operations short–term assets are also 2. Working capital means current assets. —Mead, required. The term working capital is commonly Baker and Malott used for the capital required for day-to-day working 3. “The sum of the current assets is the working in a business concern, such as for purchasing raw capital of the business” —J.S.Mill Working capital material, for meeting day-to-day expenditure on is defined as “the excess of current assets over salaries, wages, rents rates, advertising etc. But current liabilities and provisions”. But as per there are much disagreement among various accounting terminology, it is difference between the financial authorities (Financiers, accountants, inflow and outflow of funds. In the Annual Survey businessmen and economists) as to the exact of Industries (1961), working capital is defined to meaning of the term working capital. include “Stocks of materials, fuels, semi-finished goods including work-in-progress and finished INTRODUCTION goods and byproducts; cash in hand and bank and In financial management, two important decisions the algebraic sum of sundry creditors as represented are very vital and crucial. They are decision by regarding fixed assets/fixed capital and decision regarding working capital/current assets. Both are (a) outstanding factory payments e.g. rent, wages, important and a firm always analyzes their effect to interest and dividend; final impact upon profitability and risk. Fixed capital refers to the funds invested in such fixed or (b) purchase of goods and services; permanent assets as land, building, and machinery etc. Whereas working capital refers to the funds (c) short-term loans and advances and sundry locked up in materials, work in progress, finished debtors comprising amounts due to the factory on goods, receivables, and cash etc. Thus, in very account of sale of goods and services and advances simple words, working capital may be defined as towards tax payments”. “capital invested in current assets.” Here current assets are those assets, which can be converted into The term “working capital” is often referred to cash within a short period of time and the cash “circulating capital” which is frequently used to received is again invested into these assets. Thus, it denote those assets which are changed with relative is constantly receiving or circulating. Hence, speed from one form to another i.e., starting from working capital is also known as circulating capital cash, changing to raw materials, converting into or floating capital. work-in-progress and finished products, sale of finished products and ending with realization of DEFINITION AND CLASSIFICATION OF cash from debtors. Working capital has been WORKING CAPITAL: described as the “life blood of any business which Working capital refers to the circulating capital is apt because it constitutes a cyclically flowing required to meet the day to day operations of a stream through the business”. IJSMER201710 305 | Page ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in OBJECTIVES OF THE STUDY ii. Credit policy i.e. credit period given to (1) To minimize idle cost of men and machines Customers and credit period allowed by creditors. causes by shortage of raw materials, stores and Thus, the sum total of these times is called an spare parts. “Operating cycle” and it consists of the following (2) To keep down: six steps: (a) Inventory ordering cost. i. Conversion of cash into raw materials. (b) Inventory carrying cost, ii. Conversion of raw materials into work-in- (c) Capital investment in inventories. process. (d) Obsolescence losses iii. Conversion of work-in-process into finished products. SCOPE OF WORKING CAPITAL iv. Time for sale of finished goods—cash sales and For smooth running an enterprise, adequate amount credit sales. of working capital is very essential. Efficiency in v. Time for realization from debtors and Bills this area can help, to utilize fixed assets gainfully, receivables into cash. to assure the firm’s long- term success and to vi. Credit period allowed by creditors for credit achieve the overall goal of maximization of the purchase of raw materials, shareholders, fund. Shortage or bad management of inventory and creditors for wages and overheads. cash may result in loss of cash discount and loss of reputation due to non-payment of obligation on due RESEARCH METHODOLOGY dates. Insufficient inventories may be the main cause of production held up and it may compel the There are two concepts of working capital viz. enterprises to purchase raw materials at quantitative and qualitative. Some people also unfavourable rates. Like-wise facility of credit sale define the two concepts as gross concept and net is also very essential for sales promotions. It is concept. According to quantitative concept, rightly observed that “many a times business failure the amount of working capital refers to ‘total of takes place due to lack of working capital.” current assets’. Current assets are considered to be Adequate working capital provides a cushion for gross working capital in this concept. bad days, as a concern can pass its period of The qualitative concept gives an idea regarding depression without much difficulty. source of financing capital. According to qualitative concept the amount of working capital refers to O’ Donnel correctly explained the significance of “excess of current assets over current adequate working capital and mentioned that “to liabilities.” L.J. Guthmann defined working capital avoid interruption in the production schedule and as “the portion of a firm’s current assets which are maintain sales, a concern requires funds financed from long–term funds.” to finance inventories and receivables.” The excess of current assets over current liabilities is termed as ‘Net working capital’. In this concept The adequacy of cash and current assets together “Net working capital” represents the amount of with their efficient handling virtually determines the current assets which would remain if all current survival or demise of a concern. An enterprise liabilities were paid. Both the concepts of working should maintain adequate working capital for its capital have their own points of importance. “If the smooth functioning. Both, excessive working objectives is to measure the size and extent to capital and inadequate working capital will impair which current assets are being used, ‘Gross the profitability and general health of a concern. concept’ is useful; whereas in evaluating the Therefore working capital is needed till a firm gets liquidity position of an undertaking ‘Net concept’ cash on sale of finished products. It depends on two becomes pertinent and preferable. It is necessary to factors: understand the meaning of current assets and i. Manufacturing cycle i.e. time required for current liabilities for learning the meaning of converting the raw material into finished product; working capital, which is explained below. Current and assets – It is rightly observed that “Current assets IJSMER201710 306 | Page ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in have a short life span. These types of assets are dividends or any other such things. The following engaged in current operation of a business and points mention relating to various elements of normally used for short– term operations of the firm working capital deserves: during an accounting period i.e. within twelve months. The two important characteristics of such Inventory– Inventory is major item of current assets are, assets. The management of inventories – raw material, goods-in-process and finished goods is an (i) Short life span, and important factor in the short-run liquidity positions (ii) Swift transformation into other form of assets. and long-term profitability of the company. Cash balance may be held idle for a week or two, Raw material inventories– Uncertainties about the account receivable may have a life span of 30 to 60 future demand for finished goods, together with the days, and inventories may be held for 30 to 100 cost of adjusting production to change in demand days.” Fitzgerald defined current assets as, “cash will cause a financial manager to desire some level and other assets which are expected to be converted of raw material inventory. In the absence of such in to cash in the ordinary course of business within inventory, the company could respond to increased one year or within such longer period as constitutes demand for finished goods only by incurring the normal operating cycle of a business.” explicit clerical and other transactions costs of ordinary raw material for processing into finished Current liabilities – The firm creates a Current goods to meet that demand. If changes in demand Liability towards creditors (sellers) from whom it are frequent, these order costs may become has purchased raw materials on credit. This liability relatively large. Moreover, attempts to purchases is also known as accounts payable and shown in the hastily the needed raw material may necessitate balance sheet till the payment has been made to the payment of premium purchases prices to obtain creditors.
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