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 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. 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 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 “” 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. quick delivery and, thus, raises cost of production. Finally, unavoidable delays in acquiring raw The claims or obligations which are normally material may cause the production process to shut expected to mature for payment within an down and then re-start again raising cost of accounting cycle are known as current liabilities. production. Under these conditions the company These can be defined as “those liabilities where cannot respond promptly to changes in demand liquidation is reasonably expected to require the use without sustaining high costs. Hence, some level of of existing resources properly classifiable as current raw materials inventory has to be held to reduce assets, or the creation of other current assets, or the such costs. Determining its proper level requires an creation of other current liabilities.” Circulating assessment of costs of buying and holding capital – working capital is also known as inventories and a comparison with the costs of ‘circulating capital or current capital.’ “The use of maintaining insufficient level of inventories. the term circulating capital instead of working capital indicates that its flow is circular in nature.” Work-in-process inventory– This inventory is built up due to production cycle. Production cycle is STRUCTURE OF WORKING CAPITAL the time-span between introduction of raw material The study of structure of working capital is another into production and emergence of finished product name for the study of working capital cycle. In at the completion of production cycle. Till the other words, it can be said that the study of production cycle is completed, the stock of work- structure of working capital is the study of the in-process has to be maintained. elements of current assets viz. inventory, receivable, cash and bank balances and other liquid Finished goods inventory– Finished goods are resources like short-term or temporary investments. required for reasons similar to those causing the Current liabilities usually comprise bank company to hold raw materials inventories. borrowings, trade credits, assessed tax and unpaid Customer’s demand for finished goods is uncertain

IJSMER201710 307 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in

and variable. If a company carries no finished may tend to purchase goods when cash is available goods inventory, unanticipated increases in to them. Erratic and perhaps cyclical purchasing customer demand would require sudden increases in patterns may then result unless credit can be the rate of production to meet the demand. Such obtained elsewhere. Even if customers do obtain rapid increase in the rate of production may be very credit elsewhere, they must incur additional cost of expensive to accomplish. Rather than loss of sales, search in arranging for a loan costs that can be because the additional finished goods are not estimated when credit is given by a supplier. immediately available or sustain high costs of rapid Therefore, extension of credit to customers may additional production, it may be cheaper to hold a well smooth out of the pattern of sales and cash finished goods inventory. The flexibility afforded inflows to the firm over time since customers need by such an inventory allows a company to meet not wait for some inflows of cash to make a unanticipated customer demands at relatively lower purchase. To the extent that sales are smoothed, costs than if such an inventory is not held. Thus, to cost of adjusting production to changes in the level develop successfully optimum inventory policies, of sales should be reduced. Finally, the extension of the management needs to know about the functions credit by firms may act to increase near-term sales. of inventory, the cost of carrying inventory, Customers need not wait to accumulate necessary economic order quantity and safety stock. Industrial cash to purchase an item but can acquire it machinery is usually very costly and it is highly immediately on credit. This behaviour has the effect uneconomical to allow it to lie idle. Skilled labour of shifting future sales close to the present time. also cannot be hired and fired at will. Modern Therefore, the extension of credit by a firm and the requirements are also urgent. Since requirements resulting investment in receivables occurs because cannot wait and since the cost of keeping machine it pays a firm to do so. Costs of collecting revenues and men idle is higher, than the cost of storing the and adapting to fluctuating customer demands may material, it is economical to hold inventories to the make it desirable to offer the convenience required extent. associated with credit to firm’s customers. To the extents that near sales are also increased, extension Receivables – Many firms make credit sales and as of credit is made even more attractive for the firm. a result thereof carry receivable as a current asset. The practice of carrying receivables has several Cash and interest-bearing liquid assets– Cash is advantages viz., one of the most important tools of day-to-day (i) reduction of collection costs over cash operation, because it is a form of collection, which is available for assignment to any use. (ii) Reduction in the variability of sales, and Cash is often the primary factor which decides the (iii) increase in the level of near-term sales. course of business destiny. The decision to expand a business may be determined by the availability of While immediate collection of cash appears to be in cash and the borrowing of funds will frequently be the interest of shareholders, the cost of that policy dictated by cash position. Cash-in-hand, however, is may be very high relative to costs associated with a non-earning asset. This leads to the question as to delaying the receipt of cash by extension of credit. what is the optimum level of this idle resource. This Imagine, for example, an electric supply company optimum depends on various factors such as the employing a person at every house constantly manufacturing cycle, the sale and collection cycle, reading electricity meter and collecting cash from age of the bills and on the maturing of debt. It also him every minute as electricity is consumed. It is depends upon the liquidity of other current assets far cheaper for accumulating electricity usage and and the matter of expansion. While a liberal bill once a month. This of course, is a decision to maintenance of cash provides a sense of security, a carry receivables on the part of the company. It may lack of sufficiency of cash hampers day-to-day also be true that the extension of credit by the firm operations. Prudence, therefore, requires that no to its customers may reduce the variability of sales more cash should be kept on hand than the optimum over time. Customers confined to cash purchases required for handling miscellaneous transactions

IJSMER201710 308 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in over the counter and petty disbursements etc. It has a) Concept based working capital not become a practice with business enterprises to b) Time based working capital avoid too much redundant cash by investing a c) Classification on the basis of financial reports. portion of their earnings in assets which are susceptible to easy conversion into cash. Such CONCEPT BASED WORKING CAPITAL assets may include government securities, bonds, 1. Gross Working Capital debentures and shares that are known to be readily 2. Net Working Capital marketable and that may be liquidated at a 3. Negative Working Capital moment’s notice when cash is needed. CONCEPTS OF WORKING CAPITAL CIRCULATION OF WORKING CAPITAL 1. Gross Working Capital: It refers to the firm’s At one given time both the current assets and investment in total current or circulating assets. current liabilities exist in the business. The current assets and current liabilities are flowing round in a 2. Net Working Capital:The term “Net Working business like an electric current. However, “The Capital” has been defined in two different ways: working capital plays the same role in the business i. It is the excess of current assets over current as the role of heart in human body. Working capital liabilities. This is, as a matter of fact, the most funds are generated and these funds are circulated commonly accepted definition. Some people define in the business. As and when this circulation stops, it as only the difference between current assets and the business becomes lifeless. It is because of this current liabilities. The former seems to be a better reason that he working capital is known as the definition as compared to the latter. circulating capital as it circulates in the business ii. It is that portion of a firm’s current assets which just like blood in the human body.” is financed by long-term funds.

1. Gross Working Capital: It refers to the firm’s 3. Negative Working Capital: This situation occurs investment in total current or circulating assets. when the current liabilities exceed the current assets. It is an indication of crisis to the firm. 2. Net Working Capital:The term “Net Working Capital” has been defined in two different ways: TIME BASED WORKING CAPITAL i. It is the excess of current assets over current 1. Permanent or Fixed Working Capital liabilities. This is, as a matter of fact, the most (a) Regular Working Capital commonly accepted definition. Some people define (b) Reserve Working Capital it as only the difference between current assets and current liabilities. The former seems to be a better 2. Temporary or Variable Working Capital definition as compared to the latter. (a) Seasonal Working Capital ii. It is that portion of a firm’s current assets which (b) Special Working Capital is financed by long-term funds. 1. Permanent Working Capital: This refers to that 3. Permanent Working Capital: This refers to that minimum amount of investment in all current assets minimum amount of investment in all current assets which is required at all times to carry out minimum which is required at all times to carry out minimum level of business activities. In other words, it level of business activities. In other words, it represents the current assets required on a represents the current assets required on a continuing basis over the entire year. Tandon continuing basis over the entire year. Tandon Committee has referred to this type of working Committee has referred to this type of working capital as “Core current assets”. The following are capital as “Core current assets”. the characteristics of this type of working capital:

Working Capital may be classified in two ways 1. Amount of permanent working capital remains in (Kinds of Working Capital) the business in one form or another. This is

IJSMER201710 309 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in

particularly important from the point of view of DETERMINANTS OF WORKING CAPITAL : financing. The suppliers of such working capital The factors influencing the working capital should not expect its return during the life-time of decisions of a firm may be classified as two groups, the firm. such as internal factors and external factors. The internal factors includes, nature of business size of 2. It also grows with the size of the business. In business, firm’s product policy, credit policy, other words, greater the size of the business, greater dividend policy, and access to money and capital is the amount of such working capital and vice markets, growth and expansion of business etc. The versa Permanent working capital is permanently external factors include business fluctuations, needed for the business and therefore it should be changes in the technology, infrastructural facilities, financed out of long-term funds. import policy and the taxation policy etc. These factors are discussed in brief in the following lines. 2. Temporary Working Capital: The amount of such working capital keeps on fluctuating from time I. Internal Factors to time on the basis of business activities. In other words, it represents additional current assets 1. Nature and size of the business required at different times during the operating The working capital requirements of a firm are year. For example, extra inventory has to be basically influenced by the nature and size of the maintained to support sales during peak sales business. Size may be measured in terms of the period. Similarly, receivable also increase and must scale of operations. A firm with larger scale of be financed during period of high sales. On the operations will need more working capital than a other hand investment in inventories, receivables, small firm. Similarly, the nature of the business - etc., will decrease in periods of depression. influence the working capital decisions. Trading Suppliers of temporary working capital can expect and financial firms have less investment in fixed its return during off season when it is not required assets. But require a large sum of money to be by the firm. Hence, temporary working capital is invested in working capital. Retail stores, business generally financed from short- term sources of units require larger amount of working capital, finance such as bank credit. where as, public utilities need less working capital and more funds to invest in fixed assets. Classification on the basis of financial reports – The information of working capital can be collected 2. Firm’s production policy from Balance Sheet or Profit and Loss Account; as The firm’s production policy (manufacturing cycle) such the working capital may be classified as is an important factor to decide the working capital follows: requirement of a firm. The production cycle starts with the purchase and use of raw material and (i) Cash Working Capital – This is calculated from completes with the production of finished goods. the information contained in profit and loss account. On the other hand production policy is uniform This concept of working capital has assumed a great production policy or seasonal production policy significance in recent years as it shows the etc., also influences the working capital decisions. adequacy of cash flow in business. It is based on Larger the manufacturing cycle and uniform ‘Operating Cycle Concept’. production policy – larger will be the requirement of working capital. The working capital (ii) Balance Sheet Working Capital – The data for requirement will be higher with varying production Balance Sheet Working Capital is collected from schedules in accordance with the changing demand. the balance sheet. On this basis the Working Capital can also be divided in three more types, viz., gross 3. Firm’s credit policy Working Capital, net Working Capital and Working The credit policy of a firm influences credit policy Capital deficit. of working capital. A firm following liberal credit policy to all customers requires funds. On the other

IJSMER201710 310 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in hand, the firm adopting strict credit policy and grant The working capital requirements of a firm are credit facilities to few potential customers will depend upon the co-ordination between production require less amount of working capital. and distribution activities. The greater and effective the co-ordinations, the pressure on the working 4. Availability of credit capital will be minimized. In the absence of co- The working capital requirements of a firm are also ordination, demand for working capital is reduced. affected by credit terms granted by its suppliers – i.e. creditors. A firm will need less working capital II. External Factors if liberal credit terms are available to it. Similarly, the availability of credit from banks also influences 1. Business fluctuations the working capital needs of the firm. A firm, which Most firms experience fluctuations in demand for can get bank credit easily on favorable conditions, their products and services. These business will be operated with less working capital than a variations affect the working capital requirements. firm without such a facility. When there is an upward swing in the economy, sales will increase, correspondingly, the firm’s 5. Growth and expansion of business investment in inventories and book debts will also Working capital requirement of a business firm tend increase. Under boom, additional investment in to increase in correspondence with growth in sales fixed assets may be made by some firms to increase volume and fixed assets. A growing firm may need their productive capacity. This act of the firm will funds to invest in fixed assets in order to sustain its require additional funds. On the other hand when, growing production and sales. This will, in turn, there is a decline in economy, sales will come down increase investment in current assets to support and consequently the conditions, the firm try to increased scale of operations. Thus, a growing firm reduce their short-term borrowings. Similarly the needs additional funds continuously. seasonal fluctuations may also affect the requirement of working capital of a firm. 6. Profit margin and dividend policy The magnitude of working capital in a firm is 2. Changes in the technology dependent upon its profit margin and dividend The technological changes and developments in the policy. A high net profit margin contributes towards area of production can have immediate effects on the working capital pool. To the extent the net profit the need for working capital. If the firm wish to has been earned in cash, it becomes a source of install a new machine in the place of old system, the working capital. This depends upon the dividend new system can utilise less expensive raw materials, policy of the firm. Distribution of high proportion the inventory needs may be reduced there by of profits in the form of cash dividends results in a working capital needs. drain on cash resources and thus reduces company’s working capital to that extent. The working capital 3. Import policy position of the firm is strengthened if the Import policy of the Government may also effect management follows conservative dividend policy the levels of working capital of a firm since they and vice versa. have to arrange funds for importing goods at specified times. 7. Operating efficiency of the firm 4. Infrastructural facilities Operating efficiency means the optimum utilisation The firms may require additional funds to maintain of a firm’s resources at minimum cost. If a firm the levels of inventory and other current assets, successfully controls operating cost, it will be able when there is a good infrastructural facility in the to improve net profit margin which, will, in turn, company like transportation and communications. release greater funds for working capital purposes. 5. Taxation policy 8. Co-ordinating activities in firm The tax policies of the Government will influence the working capital decisions. If the Government

IJSMER201710 311 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in

follows regressive taxation policy, i.e. imposing their efficiency, reduces wastages and costs and heavy tax burdens on business firms, they are left enhances production and profits. with very little profits for distribution and retention purpose. Consequently the firm has to borrow 7. Exploitation of favourable market conditions: additional funds to meet their increased working Only concerns with adequate working capital can capital needs. When there is a liberalized tax policy, exploit favourable market conditions such as the pressure on working capital requirement is purchasing its requirements in bulk when the prices minimized. Thus the working capital requirements are lower and by holding its inventories for higher of a firm are influenced by the internal and external prices. factors. 8. Ability to face crisis: Adequate working capital IMPORTANCE OR ADVANTAGES OF enables a concern to face business crisis in ADEQUATE WORKING CAPITAL emergencies such as depression because during Working capital is the life blood and nerve centre of such periods, generally, there is much pressure on a business. Just as circulation of blood is essential working capital. in the human body for maintaining life, working capital is very essential to maintain the smooth 9. Quick and regular return on investments: running of a business. No business can run Every Investor wants a quick and regular return on successfully without an adequate amount of his investments. Sufficiency of working capital working capital. The main advantages of enables a concern to pay quick and regular maintaining adequate amount of working capital are dividends to its investors as there may not be much as follows: pressure to plough back profits. This gains the confidence of its investors and creates a favourable 1. Solvency of the business: Adequate working market to raise additional funds i.e., the future. capital helps in maintaining solvency of the business by providing uninterrupted flow of 10. High morale: Adequacy of working capital production. creates an environment of security, confidence, and high morale and creates overall efficiency in a 2. Goodwill: Sufficient working capital enables a business. Excess or Inadequate Working Capital business concern to make prompt payments and Every business concern should have adequate hence helps in creating and maintaining goodwill. working capital to run its business operations. It should have neither redundant or excess working 3. Easy loans: A concern having adequate working capital nor inadequate nor shortage of working capital, high solvency and good credit standing can capital. Both excess as well as short working capital arrange loans from banks and other on easy and positions are bad for any business. However, out of favourable terms. the two, it is the inadequacy of working capital which is more dangerous from the point of view of 4. Cash discounts: Adequate working capital also the firm. enables a concern to avail cash discounts on the purchases and hence it reduces costs. LIMITATION OF WORKING CAPITAL 5. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw 1. Excessive Working Capital means ideal funds materials and continuous production. which earn no profits for the business and hence the business cannot earn a proper rate of return on its 6. Regular payment of salaries, wages and other investments. day-to-day commitments: A company which has ample working capital can make regular payment of 2. When there is a redundant working capital, it salaries, wages and other day-today commitments may lead to unnecessary purchasing and which raises the morale of its employees, increases

IJSMER201710 312 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in accumulation of inventories causing more chances working capital. Generally the following factors of theft, waste and losses. influence the working capital requirements of the firm: 3. Excessive working capital implies excessive debtors and defective credit policy which may  Nature and size of the business cause higher incidence of bad debts.  Seasonal fluctuations  Production policy 4. It may result into overall inefficiency in the  Taxation organization.  Depreciation policy  Reserve policy 5. When there is excessive working capital,  Dividend policy relations with banks and other financial institutions  Credit policy: may not be maintained.  Growth and expansion  Price level changes 6. Due to low rate of return on investments, the  Operating efficiency value of shares may also fall.  Profit margin and profit appropriation

7. The redundant working capital gives rise to CONCLUSION speculative transactions. Funds are needed in every business for carrying on day- to-day operations. Working capital funds are 8. A concern which has inadequate working capital regarded as the life blood of a business firm. A firm cannot pay its short-term liabilities in time. Thus, it can exist and survive without making profit but will lose its reputation and shall not be able to get cannot survive without working capital funds. If a good credit facilities. firm is not earning profit it may be termed as ‘sick’, but, not having working capital may cause its 9. It cannot buy its requirements in bulk and cannot bankruptcy working capital in order to survive. The avail of discounts, etc. alternatives are not pleasant. Bankruptcy is one alternative. Being acquired on unfavourable term as 10. It becomes difficult for the firm to exploit another. Thus, each firm must decide how to favourable market conditions and undertake balance the amount of working capital it holds, profitable projects due to lack of working capital. against the risk of failure.” Working capital has acquired a great significance 11. The firm cannot pay day-to-day expenses of its and sound position in the recent past for the twin operations and its creates inefficiencies, increases objects of profitability and liquidity. In period of costs and reduces the profits of the business. rising capital costs and scare funds, the working capital is one of the most important areas requiring 12. It becomes impossible to utilize efficiently the management review. It is rightly observed that, fixed assets due to non-availability of liquid funds. “Constant management review is required to maintain appropriate levels in the various working 13. The rate of return on investments also falls with capital accounts.” Mainly the success of a concern the shortage of working capital. depends upon proper management of working capital so “working capital management has been SUGGESTIONS looked upon as the driving seat of financial A large number of factors influence the working manager.” It consumes a great deal of time to capital need of the firms. All factors are of different increase profitability as well as to maintain proper importance and also importance change for the firm liquidity at minimum risk. There are many aspects over time. Therefore, an analysis of the relevant of working capital management which make it an factors should be made in order to determine the important function of the finance manager. In fact total investment in we need to know when to look for working capital

IJSMER201710 313 | Page

ISSN: 2455-6203 International Journal of Science Management & Engineering Research (IJSMER) Volume 02: Issue 02: | April 2017 www.ejournal.rems.co.in funds, how to use them and how measure, plan and 10. E. W. Walker, “Essentials of Financial control them. A study of working capital Management”, Prentice Hall Inc., New York, 1935. management is very important foe internal and external experts. Sales expansion, dividend declaration, plants expansion, new product line, increase in salaries and wages, rising price level, etc., put added strain on working capital maintenance.

References

1. I. M. Pandey, “Financial Management”, 2002, Vikas Publishing House Pvt. Ltd., New Delhi.

2. S. C. Kuchhal, “Financial Management – An Analytical and Conceptual Approach”, Chaitanya Publishing House, Allahabad, 1993.

3. Dr. S. N. Maheshwari, “Principles of Management Accounting”, Sultan Chand 7 Sons, New Delhi, 2001.

4. Charles T. Horngren, Gary L. Sudem, John A. Elliott, “Introduction to Financial Accounting”, Eighth Edition Pearson Education (Singapore) Pte. Ltd., Indian Branch, Delhi, 2002.

5. Asish K. Bhattacharyya, “Financial Accounting for Business Managers”, Prentice Hall of India Private Limited, Connaught Circus, New Delhi, 2007. 6. Poulke, Roy A – “Practical Financial Statement Analysis”, Tata McGraw Hill Publishing Co. Ltd., New Dellhi , Edition 1972.

7. James C. Van Horne & John M. Wachowicz, Jr., “Fundamentals of Financial Management”, Pearson Education (Singapore) Pte. Ltd., Indian Branch, Delhi, 2005.

8. M. Y. Khan & P K Jain, “Financial Management – Text and Problems”, Tata McGraw – Hill Publishing Company Limited, New Delhi, 2003.

9. Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGraw Hill Publishing Company Limited, New Delhi, 2002.

IJSMER201710 314 | Page