Workingcapital

3.1.1 WORKING CAPITAL

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital - gross and net.

* GROSS WORKING CAPITAL: It refers to the firm's Investment in current assets which can be converted into cash within an accounting year(or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory)

* NET WORKING CAPITAL: It refers to the difference between Current Assets & Current Liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an Accounting year and include creditors (accounts payable) ,bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when Current Assets increase current liabilities. A negative net working capital will occur when Current Liabilities are in excess of Current Assets.

3.1.2 NATURE OF WORKING CAPITAL

EXCESSIVE AND INADEQUATE WORKING CAPITAL: A business enterprise should maintain adequate working capital according to the needs of its business of its business operations. The amount of working capital should neither be excessive nor adequate. If the working capital is excess of its requirements it means idle funds adding to the cost of capital is short of its requirements, it will result in production interruptions and reduction of sales and, in turn, will affect the profitability of the business adversely.

3.1.3 DEFECIENCIES OF EXCESSIVE WORKING CAPITAL

* EXCESSIVE INVENTORY: Excessive working capital results in unnecessary accumulation of large inventory. It increases the chances of misuse, waste, theft etc.

* EXCESSIVE DEBTORS: Excessive working capital will result in liberal credit policy which, in turn, will result in higher amount tied up in debtors and higher incidence of bad debts.

* ADVERSE EFFECT ON PROFITABILITY: Excessive working capital means idle funds in the business which adds to the cost of capital but earns no profits for the firm. Hence it has a bad effect on profitability of the firm.

* INEFFECIENCY OF MANAGEMENT: Management becomes careless due to excessive resources at their command. It results in laxity of control on epenses and cash resources.

3.1.4 DEFECIENCIES OF INADEQUATE WORKING CAPITAL

* DIFFICULTY IN AVALIABILITY OF RAW-MATERIAL: Inadequacy of working capital results in non-payment of creditors on time. As a result the credit purchase of goods on favorable terms becomes increasingly difficult. Also, the firm cannot avail the cash.

* FULL UTILISATION OF FIXED ASSETS NOT POSSIBLE: Due to the frequent interruption in supply of raw materials and paucity of stock, the firm can't make full utilization of its machines etc.

* DIFFICULTY IN THE MAINTAINENCE OF MACHINERY: Due to the shortage of working capital, machines are not cared and maintained properly which results in the closure of production of on many occasions.

* DECRAESE IN CREDIT RATING: Because of inadequacy of working capital, firm is unable to pay its short term obligations on time. It decays the firm's relation with its bankers and it becomes difficult for the firm to borrow in case of need.

3.1.5 ADVANTAGES OF ADEQUATE WORKING CAPITAL

* AVAILIABILTY OF RAW MATERIAL REGULARLY: Adequacy of working capital makes it possible for a firm to pay the suppliers of raw material in time. As a result it will continue to receive regular supplies of raw materials and thus there will be no disruption in production process.

* FULL UTILISATION OF FIXED ASSETS: Adequacy of working capital makes it possible for a firm to utilize its fixed assets fully and continuously. For eg. , if there is inadequate stock of raw material, the machines will not be utilized in full and their productivity will be reduced.

* CASH DICOUNT: A firm having