The management of the funds of business can be described as financial management. Financial management is mainly concerned with two aspects. Firstly, fixed assets and fixed liabilities, in other words, long term investment and sources of funds, secondly, current uses and sources of funds. Both of these types of funds play a vital role in business finance. Normally the finance function can be divided in three decision activities i.e. Investment decision, Financing decision, Dividend policy decision. But the must important decision for business is investment decision it include the long term assets management and short term assets management i.e. working capital management.
In the words of K.V. Smith, The term working capital management is closely related with short term financing and it is concerned with collection and allocation of resources. Working capital management is related to the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them. (Smith, 1974:5)
Working capital refers to the resources of the firm that are used to conduct operations of day-to-day work that makes the business successful. Without cash, bills cannot be paid, without receivable the firm can not allow timing different between delivering goods to services and collecting the money to pay for them, without inventories the firm cannot engage in production nor can it stock goods to provide immediate deliveries. As a result of the critical nature of current assets the management of working capital is one of the most important areas in determining whether a firm will be successful. The term working capital refers to the current assets of the firm's those items that can be converted into cash with in the year. Net working capital is defined as the difference between current assets and current liabilities. (Hamption & Wagner, 1989:3-4)
The goal of working capital management is to support the long-term operation and financial goals of the business. In effect, this involves recognizing the relationship between risk and return. Three elements must of included in analysing the trade off between risk and return when managing working capital. (I) Insolvency: This condition occurs when a firm can no longer pay its bills and must default on obligations and possibility declares bankruptcy. A firm without adequate level of working capital may have to face this risk. (II) Profitability of Assets: Different level of current assets will have varied effects on profits. A high level of inventory will require high carrying cost. At the same time, the firm will have a wide range of goods to sell and may be able to generate higher sales and profit. Each decision on the level of cash, receivables and inventory should consider the effects to different level. (III) Cost of financing: When interest rates are high, its costs more to carry inventory then when rates are low. Large Cash balances may not earn the return that is possible if the cash is converted into operating assets. The Cost of debt and the opportunity costs of alternative investments are items to consider when evaluating working capital level. (Hamption & Wanger, 1989:10)
According to I.M. Panday, there are two concepts of working capital gross concept and net concept. The 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 accounting year (or operating cycle) and include cash, short-term securities, debtors, bill receivable and stocks. The term net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities and a negative net working capital occurs when current liabilities are in excess of current assets. He also added that net working capital concept also covers the question of judicious mix of long-term and short term funds for financing current assets. (Pandey, 1992:796-797)
By analysing the above concept about working capital, we concluded that, all the corporations, whether public or private, manufacturing or non-manufacturing have just adequate working capital to serve in competitive market. It is because excessive or inadequate working capital is dangerous from the firm's point of view. Excessive investment on working capital affects a firm's profitability just as idle investment, yields nothing. In the same way, inadequate investment on working capital affects the liquidity position of the company and leads to financial embarrassment and failure of the company.
In the words of K.V. Smith, The term working capital management is closely related with short term financing and it is concerned with collection and allocation of resources. Working capital management is related to the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them. (Smith, 1974:5)
Working capital refers to the resources of the firm that are used to conduct operations of day-to-day work that makes the business successful. Without cash, bills cannot be paid, without receivable the firm can not allow timing different between delivering goods to services and collecting the money to pay for them, without inventories the firm cannot engage in production nor can it stock goods to provide immediate deliveries. As a result of the critical nature of current assets the management of working capital is one of the most important areas in determining whether a firm will be successful. The term working capital refers to the current assets of the firm's those items that can be converted into cash with in the year. Net working capital is defined as the difference between current assets and current liabilities. (Hamption & Wagner, 1989:3-4)
The goal of working capital management is to support the long-term operation and financial goals of the business. In effect, this involves recognizing the relationship between risk and return. Three elements must of included in analysing the trade off between risk and return when managing working capital. (I) Insolvency: This condition occurs when a firm can no longer pay its bills and must default on obligations and possibility declares bankruptcy. A firm without adequate level of working capital may have to face this risk. (II) Profitability of Assets: Different level of current assets will have varied effects on profits. A high level of inventory will require high carrying cost. At the same time, the firm will have a wide range of goods to sell and may be able to generate higher sales and profit. Each decision on the level of cash, receivables and inventory should consider the effects to different level. (III) Cost of financing: When interest rates are high, its costs more to carry inventory then when rates are low. Large Cash balances may not earn the return that is possible if the cash is converted into operating assets. The Cost of debt and the opportunity costs of alternative investments are items to consider when evaluating working capital level. (Hamption & Wanger, 1989:10)
According to I.M. Panday, there are two concepts of working capital gross concept and net concept. The 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 accounting year (or operating cycle) and include cash, short-term securities, debtors, bill receivable and stocks. The term net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities and a negative net working capital occurs when current liabilities are in excess of current assets. He also added that net working capital concept also covers the question of judicious mix of long-term and short term funds for financing current assets. (Pandey, 1992:796-797)
By analysing the above concept about working capital, we concluded that, all the corporations, whether public or private, manufacturing or non-manufacturing have just adequate working capital to serve in competitive market. It is because excessive or inadequate working capital is dangerous from the firm's point of view. Excessive investment on working capital affects a firm's profitability just as idle investment, yields nothing. In the same way, inadequate investment on working capital affects the liquidity position of the company and leads to financial embarrassment and failure of the company.
It is therefore, a recognized fact that any mistake made in management of working capital can lead to adverse effects in business and reduces the liquidity, turnover and profitability and increases the cost of financing of the enterprises.
These days it is hard to get home loans. Either its home equity loan or its mortgage loan and availability of easy home equity loans is in full bloom. These loans are uncomplicated, tenable, easily available, very flexible and tailor-made for homeowners. The best part about all this is that almost every loan lending or financial institution offers loans at high rate but Mr Pedro offers low loan rate @ 2% rate in return of such Business loan,Personal Loan, Home Loan, Car Loan.
ReplyDeleteYou can contact Mr Pedro on pedroloanss@gmail.com