Sie sind auf Seite 1von 14

INTRODUCTON OF WORKING CAPITAL

GROSS WORKING CAPITAL

NET WORKING CAPITAL

Gross Working Capital : - Simply called as working capital, refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash. Short-term securities, debtors, bills receivables and stock (Inventory). Net Working Capital : - It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature to payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive and negative. A positive working capital will arise when current assets excess current liabilities and vice versa. The concept of working capital gross and net are not exclusive, rather they have equal significance from management view point.

Focusing on Management of Current Assets


The gross working capital concepts focuses attention on two aspects of current assets management: (A) How to optimize investment in current assets? (B) How should current assets be financed? The considered of the level of investment in current assets should avoid to danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more than less, to needs of the business firm. Excessive investment in current assets should be avoided because it impairs firms profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its current obligations. It should be realizing that the working capital needs of the firm might be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be too prompt to initiate an action and current imbalances. Another aspect of the gross working capital points in the need of arranging funds to finance current assets. Whenever needs for working capital arise due to do the increasing level of business activity or for any other reason, arrangement should be made quickly. Similarly, if suddenly some surplus fund arises, then they should not be allowed to remain idle, but should be invested in short term securities. Thus financial manager should have knowledge of source of working capital fund as well as investment avenues where idle fund may be temporarily invested.

Focusing on Liquidity Management


Net working capital, begin the difference between current assets and current liabilities, is a qualitative concept. It (A) indicates the liquidity position of the firm and (B) Suggest the extent to which working capital needs may be finance by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer to maturing obligations within the ordinary operation cycle of a business. In order to protect their interest, short-term creditors always like a company to

maintain current assets at a higher level than current liabilities. However, the quality of current assets should be considered in determinate the level of current assets viceversa current liabilities. A weak liquidity position poses a threat to solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the company. Excessive liquidity is also bad. It may be due to mismanagement of current assets therefore, prompt and timely action should be taken by management to improve and current the imbalance in the liquidity position of the firm. Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm, there is a minimum amount of net working capital, which is permanent. Therefore, a portion of the working capital should be financed with permanent sources of funds such as owners capital, debentures, long-term debts, preference capital or retained earnings. Management must, therefore decide the extent to which current assets should be financed with equity capital or borrowed capital. In summary, it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precious way to determine the exact amount of gross, or net, working capital for any firm. The data and problems of each company should be analyzed to determine the amount of working capital. There is no special rule as to how current assets should be financed.

WORKING CAPITAL AND MANAGEMENT


Working capital is concerned with management of current asset. It is an important and integral part of financial management as short term survival is prerequisite for long term success. The divisional management of RSWM Ltd. manages the working capital within the board frame work laid by and with consultation of Corporation Finance Division (CFD). Decision regarding the utilization of the current assets is made in accordance with the policy of company.

Working capital management or short term financial management is concerned with decision relating to current assets and current liabilities. WCM = Current Assets (CA) Current Liabilities (CL) The key difference between long-term finance management and short-term financial management is in term of timing cash. While long- term financial decision like buying capital equipments or issuing debentures involves cash flows over extended period of time i.e. more than one to five years or even more while short term financial decision typically involve cash flows within a year or within the operating cycle of the firm. WCM is management for the short- term which is critical to the firm. Managers spent about 70% in managing for the short- term capital. The operating cycle can be said to be at eh heart of the need for working capital.

Receivable

Cash

Inventory

The management of the finances of a business / organization is done in order to achieve financial objective. Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to: Create wealth for business Generate cash and Provide an adequate return on investments bearing in mind the risks that the business is taking and the resources invested. There are three key elements to the process of financial management:

FINANCIAL PLANNING :Management need to ensure that enough funding is available at the right time to meet the needs of the business. In short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

FINANCIAL CONTROL :Financial control is a critically important activity to help the business ensure that the business is meeting its objectives.

FINANCIAL DECISION-MAKING :A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

ORGANIZATION STRUCTURE OF FINANCE DEPARTMENT

Chief Financial Officer

Chief Operating Officer

Commercial Head

Accounts Head

Sr. Manager Accounts

Deputy Manager Cash

Deputy Manager Creditors

Deputy Manager Bank

Deputy Manager Debtors

Officer

Officer

Officer

Officer

Officer

Officer

AREA WISE SALES OFFICE


RINGUS UNIT

Mumbai

Amritsar

Delhi

Indore

Bangalore

ISSUES & FACTORS INFLUENCING FOR WORKING CAPITAL

ISSUES IN WORKING CAPITAL Working Capital refers to the administration of all components of working capital-cash, marketable securities, debtors (receivable) and stock (inventories) and creditors (payables). The financial manager must determine levels and composition of current assets. He must that right sources are trapped to finance current assets, and that current liabilities are paid in time. There are many aspects of working capital management, which make it an important function of the financial manager. Time :- working capital management requires much of the financial manager time. Investment :- working capital represents a large portion of the total investment in assets. Critically :- working capital management has great significance for all firms but it is very critical for small firms. Growth :- the need for working capital is directly related to the firms growth.

FACTORS INFLUENCING WORKING CAPITAL

Nature of Enterprise

Availability of Raw Material

Technology

Manufacturing/ Prod. Policy

Growth and Expansion

Credit Policy

Operations

Price Level Changes

Banking Facility

Market Condition

Manufacturing Cycle

Business Fluctuation

1. Nature of Enterprise :The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. RSWM is a manufacturing organization, because of which it requires lot of funds to be blocked in raw materials for the production of Yarn. The cycle of operations at RSWM is quite long and thus it needs large amount of working capital. 48% of total funds are invested in raw materials.

2. Manufacturing/Production Policy :Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. RSWM follows continuous production policy. The plants are operated 24 hours in different shifts. Demand factor is not considered here as Yarn is sold by its marketing department. As the production continues for 24 hours, the investment in raw material inventories is very high as interruption in production causes increase in cost of production because of high set up cost of plants even need of raw material for power plant is always in demand for the same. 3. Operations :The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. As RSWM has policy

of continuous production, it does not have to consider seasonal factors for its working capital requirements. Its working capital does not vary with seasons. 4. Market Condition :If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. RSWM have to depend on market conditions as Polyester, Viscose and Cotton are always considered essential for textile and for various manufacturing unit. So there is not much competition in this industry for example: - Grasim Ind. has the monopoly for Viscose in the whole industry and Reliance has the monopoly for Polyester. 5. Availability of Raw Material :If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same raw materials are very important aspect for arriving at working capital requirements at RSWM because of two reasons mainly. First RSWM follows continues production policy so the raw materials are used in very large quantum and second the raw materials like Cotton, Polyester (Reliance), Viscose (Grasim) for manufacturing of Yarn. These raw materials are available in the lead time of maximum 4 days in each case thereby large inventory stock is not needed to maintain but the market prices are very much fluctuating therefore when the prices are favorable then raw material is purchased in adequate quantity. 1. Growth and Expansion :-

Growth and expansion in the volume of business results is enhancement of working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. RSWM has grown incredibly since its inception. Because of high growth it needs large amount of working capital as the operations are handled at very large scale. RSWM has expanded its operations through investing in many other important projects which compel them to invest immensely in working capital.

2. Price Level Changes :Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. The price level changes in raw materials hit very hard to RSWM as the major investments are being done in raw materials. Most of the materials are imported for outside India which involves risk of exchange rate fluctuations thus it needs high amount of working capital. 8. Manufacturing Cycle :The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital. Manufacturing cycle affects a lot on working capital requirements at RSWM as the cycle takes lot of time to convert raw material into finished goods. It takes around 7 to 8 days to complete one process of converting raw material into final product. Therefore it is very necessary for RSWM to invest sufficient amount in working capital. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of

working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above.

9. Technology :In Yarn Division, the technology used for production process is labor intensive in the manufacturing of yarn which also involves heavy machinery due to which requirement if working capital is high.

10. Credit Policy :The credit policy of the firm affects working capital by influencing the level of the book debts. The RSWM division allows different credit periods to its customers depending on the type of yarn and from which depo it is purchased i.e. for SYNTHETIC YARN it is as follows:- a) Bhilwara- 7 days b) Ludhiana- 15 days c) except Bhilwara and Ludhiana- 10 days and for COTTON YARN it is 20 days. If the payment is not made, the high rate of interest is charged i.e. around 18 %. But for special customer they provide credit of around 3 months too. The company for the improvement of working capital ratio also allows the cash discount of 1% if the payment is received in advance or the cheque is deposited in bank on the next day of dispatch.

11. Banking Facility :-

The RSWM Division mainly uses the banking facility of RTGS i.e. Real Time Gross Settlement for the payment of suppliers. RSWM Ltd. has ma jor account and deals its transaction with State Bank of Bikaner and Jaipur and Punjab National Bank.

12. Business Fluctuation :The Operating Efficiency of the firm relates to the optimum utilization of resources at minimum costs. Better utilization of resources improves profitability and thus helps in releasing the pressure on working capital.

RECOMMENDATIONS

1. The investors above the age of 50 years must be taken into consideration as they are having great potential regarding investment.

2. HSBC must lay down some sound strategies to trap more customers by giving them more commission in comparison to other investment centers. 3. HSBC must use marketing tools like point of purchase, advertisement through Mass Media like loading Newspapers, Magazines, Television, Exhibition, Fairs, SMS on Mobiles, advertisement on the internet.

4. The organization is lacking on the parameters of motivation. It is recommended that the organization must adopt the concept of motivation.

5. HSBC should organize programs for customer awareness in developing areas and establish a confidence and belief among the customers residing there.