Working Capital Management Assignment Help
ABOUT WORKING CAPITAL MANAGEMENTThe word "Working capital management" applies when a company's managerial accounting policy invented to control and utilize the two segments of working capital, and current liabilities, current assets, to assure the most financially sound administration of the corporation. The principal objective of working capital management is to make convinced that a company always manages adequate cash flow to suffice its short-term operating expenses and short-term debt burdens. This type of management usually includes liabilities, assets and monitoring cash flows through ratio analysis which are some of the main primary elements of operating expenses including collection ratio, inventory turnover ratio as well as the working capital ratio. An effective working capital management helps in developing an organization’s smooth financial controlling mechanisms also helps in improving the profitability and earnings of a company or any business entity. Management of working capital mainly involves the systematic way of managing accounts receivables and payables plus inventory management too. Commonly the formula which helps in calculating working capital ratio is current assets divided by current liabilities. Now coming to the point about working capital ratio as we have given the formula of it so this acts as a significant role in indicating the organization’s basic financial health. As this helps an organization to meet all of its financial obligations in time successfully. Still, numbers may vary from industry to industries, as it is being said when the ratio of working capital for a company comes below 1.0 then it is said that the company is having issues regarding meeting its short-term obligations, this usually happens because of insufficient cash flow. Desirable working capital ratios match up around 1.0 to 2.0, but a higher ratio which rises above 2.0 then it indicates that the company is unable to make the most efficient profit due to increased revenues. The main and the final part of working capital management is inventory management, this helps in operating with maximum efficiency and maintains a standard level of working capital for a long time unless it is being converted to liquid cash. Inventory Ratio helps in maintaining the balance that how efficiently the company is working on its revenues. The formula by which inventory ratio is easier to calculate is revenues divided by inventory cost, this formula helps in revealing that how quickly the inventory of a company is being replenished and sold accordingly. Compared to industry peers a relatively low ratio indicates the stock level as expectantly high whereas a relatively high ratio indicates whether the stock levels of a company can be improved or not.
IMPORTANCE AND REQUIREMENT OF WORKING CAPITAL MANAGEMENTNEED Working capital is the life line of business. Working capital is necessary to maintain the smooth functioning of the business. Not a single business can run actively without a satisfactory result of working capital. Here are some principal advantages or importance of working capital is as follows:-
- ENHANCE GOODWILL - Satisfactory working capital allows a business affair to make quick payments hence assists in creating and managing goodwill. Goodwill is improved as all current liabilities, and operating charges are settled on time.
- REGULAR SUPPLY OF RAW MATERIAL- Immediate payment of credit acquisition of new materials assures the regular supply of raw supplies from suppliers. Suppliers or Vendors are pleased by the on time payment. It secures a steady supply of fresh elements and continuous generation.
- STRENGTHENING THE SOLVENCY- Working capital serves to operate the business easily without any financial dilemma for making the payment of short-term obligations. Purchase of raw materials and settlement of salary, wages, and expenses can be carried out without any pause. Adequate working capital helps in maintaining the solvency of the business by providing an uninterrupted flow of generation.
- SMOOTH OPERATION OF BUSINESS- Working capital is a salvation of any industrial association which manages the business in good condition. Any day to day financial requirement can be met without any shortage of fund. All investments and current liabilities are settled on time.
AIM OR OBJECTIVE OF WORKING CAPITAL MANAGEMENT STUDIESThe main aim or the objective of working capital management is to manage and maintain the balance in such a way so that a business can meet it currently profitable requirements. By saying this we must also note that being in a liquidity state does not refer that it will affect or decrease the profitability of the business completely. Rather it will be able to maintain the balance by discovering ways in smoothing out cash settlements to manage and help in stabbing the working capital of a company. The importance of managing and maintaining good working capital management so that the company can work efficiently as well as survive its daily operations which in turn will lead to long-term success. Every company should understand the importance of working capital management as it will help the company or any business entity to reach its aim and maintain the objective and work accordingly to get success every upcoming year. The amount of working capital that a company carries can be used during the time of any kind of anomalies or financial crisis. Therefore it is essential for every industry to maintain the perspective objective in such a way so that it will be easier to maintain and balance profitability and liquidity while a company is busy managing working capital. A well-managed working capital is essential for running a healthy and stable business successfully.
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