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Optimum Working Capital & Importance of Adequate Working Capital ( in Hindi)
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Heena Malhotra
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Palash Dhar
a year ago
Thank you. keep following. 🙂
mam....thank you so much🙏🙂😘
mam sundry debtor???
  1. Management of Working Capital By Heena Malhotra

  2. Importance of Adequate Working Capital Management of working capital is an essential task of the finance manager. He has to ensure that the amount of working capital available with his concern is neither too large nor too small for its requirements. A large amount of working capital would mean that the company has idle funds. Since funds have a cost, the company has to pay huge amount as interest on such funds. If the firm has inadequate working capital, such firm runs the risk of insolvency. Paucity of working capital may lead to a situation where the firm may not be able to meet its liabilities The various studies conducted by the Bureau of Public Enterprises have shown that one of the reasons for the poor performance of public sector undertakings in our country has been the large amount of funds locked up in working capital. This results in over capitalization. Over capitalization implies that a company has too large funds for its requirements, resulting in a low rate of return, a situation which implies a less than optimal use of resources. A firm, therefore, has to be very careful in estimating its working capital requirements.

  3. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long- term as well. When businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc., but must also take account of the additional current assets that are usually required with any expansion of activity. For e.g.- Increased production leads to holding of additional stocks of raw materials and work-in-progress. An increased sale usually means that the level of debtors will increase. A general increase in the firm's scale of operations tends to imply a need for greater levels of working capital. A question then arises what is an optimum amount of working capital for a firm? We can say that a firm should neither have too high an amount of working capital nor should the same be too low. It is the job of the finance manager to estimate the requirements of working capital carefully and determine the optimum level of investment in working capital By Heena Malhotra

  4. Optimum Working Capital O If a company's current assets do not exceed its current liabilities, then it may run into trouble with creditors that want their money quickly. o Current ratio (current assets/current liabilities) (along with acid test ratio to supplement it) has traditionally been considered the best indicator of the working capital situation. o It is understood that a current ratio of 2 (two) for a manufacturing firm implies that the firm has an optimum amount of working capital. This is supplemented by Acid Test Ratio (Quick assets/Current liabilities) which should be at least 1 (one). Thus it is considered that there is a comfortable liquidity position if liquid current assets are equal to current liabilities. By Heena Malhotra

  5. Optimum Working Capital o Bankers, financial institutions, financial analysts, investors and other people interested in financial statements have, for years, considered the current ratio at 'two' and the acid test ratio at 'one' as indicators of a good working capital situation. o As a thumb rule, this may be quite adequate. o However, it should be remembered that optimum working capital can be determined only with reference to the particular circumstances of a specific situation. O Thus, in a company where the inventories are easily saleable and the sundry debtors are as good as liquid cash, the current ratio may be lower than 2 and yet firm may be sound. By Heena Malhotra

  6. Optimum Working Capital O In nutshell, a firm should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous. By Heena Malhotra

  7. DETERMINANTS OF WORKING CAPITAL 1. Cash Identify the cash balance which allows for the business to meet day-to- day expenses, but reduces cash holding costs. 2. Inventory - Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and hence increases cash flow; the techniques like Just in Time (UIT) and Economic order quantity (EOQ) are used for this. 3. Receivables -Identify the appropriate credit policy, i.e, credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa). The tools like Discounts and allowances are used for this. By Heena Malhotra

  8. 4. Short-term Financing Options -Inventory is ideally financed by credit granted by the supplier; dependent on the cash conversion cycle, it may however, be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring" in order to finance working capital requirements. 5. Nature of Business For e.g. in a business of restaurant, most of the sales are in Cash. Therefore need for working capital is very less 6. Market and Demand Conditions For eg. if an item's demand far exceeds its production, the working capital requirement would be less as investment in finished goods inventory would be very less. 7. Technology and Manufacturing Policies - For e.g. in some businesses the demand for goods is seasonal, in that case a business may follow a policy for steady production through out over the whole year or instead may choose policy of production only during the demand season. By Heena Malhotra

  9. DETERMINANTS OF WORKING CAPITAL 8. Operating Efficiency - A company can reduce the working capital requirement by eliminating waste, improving coordination etc. By Heena Malhotra