Page 39 - DBP5043

INTRODUCTION WORKING CAPITAL MANAGEMENT

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

i. Normally, a substantial proportion of total assets of the firm is
made of current assets. Therefore it must be managed properly.

ii. Company must maintain a proper level of working capital so that
it is not compelled to bankruptcy when a company's total current
assets were lower than current liabilities.

iii. Each current asset is to be managed efficiently and effectively to
achieve the suitable level of liquidity and not to maintain any
current assets at a level that is too high.

iv. Working capital levels are the most important items and
generally accepted in the evaluation of firm performance. It is
used as an indication of the company's ability to meet liabilities
claims.

v. Cash is the most important component in the level of current assets
of the company. Inaccuracies in the forecast cash inflows and
outflows will cause problems in the management firm handling the
firm daily.

Factor affecting working capital level

Type of Business - Manufacturing and retail firms have higher

working capital requirements, especially in the form of inventory, as
compared with service organization

Volume of sales - A higher level of sales will require a higher level
of working capital

Seasonality - Peak seasons, for example festive seasons, require a
higher level of working capital

Length of operating and cash cycle - A longer operating and cash
cycle increases the level of working capital whereas a shorter cycle
will lower it.