Working capital is calculated by subtracting the current liabilities from current assets of a business on the day the balance sheet is drawn up.
It is not easy; it is as good as circulating 5 balls with two hands without dropping a single one. If following 6 points can be managed, this operating cycle can be management well.
It means raw material should be present on the requirement and it should not be a cause to stoppages of production. All other requirements of production should be in place before time.
The finished goods should be sold as early as possible once they are produced and inventoried. The accounts receivable should be collected on time.
Accounts payable should be paid when due without any delay. Cash should be available as and when required along with some cushion. Lowest Working Capital Working capital here refers to the current assets less current liabilities net working capital.
It should be optimized because higher working capital means higher interest cost and lower working capital means a risk of disturbance of operating cycle. Minimize Rate of Interest or Cost of Capital The cost of capital utilized on working capital should be minimized so as to achieve higher profitability.
If the investment in working capital involves bank finance, interest rates should be negotiated with the bank. Cost can be minimized by utilizing long-term funds but in a proper mix. While deciding the mix of working capital, the fundamental principle of financial management should be kept in mind that fixed assets and permanent assets should be financed by long term sources of finance of approximately same maturity and short-term or temporary assets should be financed by short-term sources of finance.
Optimal Return on Current Asset Investment The return on the investment made in current assets should be more than the weighted average cost of capital so as to ensure wealth maximization of the owners.
In other words, the rate of return earned due to investment in current assets should be more than the rate of interest or cost of capital used for financing the current assets.Objective of the study II. Meaning of working capital management III. Importance of working capital management IV.
Company profile: Britannia Industries A. History of the company V. Significance of accounting policy VI. Ways to prepare a good working capital management policy VII. Management Of Working Capital Introduction Working Capital-Definition Working Capital is the cash needed to pay for the day to day operation of the business.
Along with long term investments, business also needs funds for short-term purposes to finance current operations. Objectives of Working Capital Management The primary objective of working capital management is to ensure smooth operating cycle of the business.
Secondary objectives are to optimize the level of working capital and minimize the cost of such funds. Objectives of working capital management One of the two key objectives of working capital management is to ensure liquidity.
A business with insufficient working capital will be unable to meet obligations as they fall due, leading to late payments to employees, suppliers and other providers of credit. I. Objective of the study II. Meaning of working capital management III. Importance of working capital management IV.
Company profile: Britannia Industries A. History of the company V. Significance of accounting policy VI. Working Capital Management Objectives Maintaining the working capital operating cycle and its smooth operation is vital for a business to function.
The operating cycle or lifecycle of a business goes from the acquisition of the raw material to the seamless production and delivery of the end products.