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BRILLIANT’S Working Capital Management 137

to the day’s payables outstanding. The day’s {XZ H$m noE~b AmCQ>ñQ>¢qS>J H§$nZr Ûmam BgHo$ d|S>g© H$mo
payables outstanding are the average time ^wJVmZ H$aZo H$m Amdí`H$ Am¡gV g_` h¡& gd©àW_ ~oMr
required by the company to pay its vendors.
J`r dñVwAm| H$s bmJV H$mo AH$mC§Q²>g noE~b go ^mJ XoH$a
First, calculate the accounts payable turnover
AH$mC§Q²>g no`oE~b Q>Z©Amoda H$s JUZm H$aVo h¢& BgHo$
by dividing the cost of goods sold by accounts
payable. Next, divide 365 days by the accounts níMmV² {XZ Ho$ noE~ëg AmCQ>ñQ>¢qS>J H$m {ZYm©aU H$aZo Ho$
payable turnover to determine the day’s {bE 365 {XZm| H$mo AH$mC§Q²>g noE~b Q>Z©Amoda Ûmam ^mJ
payables outstanding. To determine the cash X|& H¡$e H§$de©Z gm`H$b H$m {ZYm©aU H$aZo Ho$ {bE g~go
conversion cycle, first add the day’s sales
nhbo {XZ H$s goëg AmCQ>ñQ>¢qS>J VWm B§d|Q>ar _| {XZ Ho$
outstanding and the day’s sales in inventory,
and then subtract the day’s payables goëg H$mo Omo‹S>o VWm BgHo$ níMmV² {XZ Ho$ noE~ëg
outstanding. The resulting cash conversion AmCQ>ñQ>¢qS>J H$mo KQ>m`|& CËnÝZ H¡$e H§$de©Z gm`H$b EH$
cycle measures the time period between the àmoS>ŠQ> `m g{d©g Ho$ CËnmXZ Ho$ {bE Amdí`H$ gm_J«r Ho$
cash outflow for materials required for the {bE H¡$e AmCQ>âbmo VWm goëg Ho$ {bE H¡$e BZâbmo Ho$
production of a product or service and the cash
~rM g_` Ad{Y H$m _mnZ H$aVm h¡& H¡$e H§$de©Z gm`H$b
inflow from sales. A decrease in the cash
conversion cycle can lead to an increase in the _| H$_r Am°naoqQ>J àm°{\$Q> _m{O©Z _| d¥{Õ H$m H$maU hmo
operating profit margin. gH$Vm h¡& 
SYMPTOMS OF POOR WORKING CAPITAL MANAGEMENT
Iam~ d{Hª$J H¡${nQ>b _¡ZoO_|Q> Ho$ bjU

Q.17. What are the symptoms of poor working capital management in a business organization?
EH$ {~OZog Am°J}ZmBOoeZ _| Iam~ d{Hª$J H¡${nQ>b _¡ZoO_|Q> Ho$ bjU Š`m h¢?
Following are some of the common Iam~ d{Hª$J H¡${nQ>b _¡ZoO_|Q> Ho$ Hw$N> gm_mÝ` bjU
symptoms of poor working capital manage- {ZåZ{b{IV h¢…
ment:
(a) The holding period of finished products (a) {\${ZíS> àmoS>ŠQ²>g aIZo H$m g_` ~‹T>Vm h¡&
increases.
(b) Recovery of cash from debtors takes time. (b) S>oãQ>g© go H¡$e àmßV H$aZo _| g_` bJVm h¡&
(c) Decreased liquidity: running out of (c) {bpŠd{S>Q>r KQ>Vr h¡… d{Hª$J H¡${nQ>b go ~mha Mbr
working capital. OmVr h¡&
(d) Overtrading: turning inventories faster (d) AmodaQ´>oqS>J… B§doÝQ>arO H$mo Q´>oS> Am¡gV go A{YH$
than trade averages. VoOr go ~XbVm h¡&

(e) Excessive short-term debt. (e) A{YH$ em°Q>© Q>_© S>oãQ>&
(f) The working capital turnover is on a high. (f) d{Hª$J H¡${nQ>b Q>Z©Amoda A{YH$ hmoVm h¡& 