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Inventory 2. Receivable 3. Cash

Managers must pay special attention to working capital because insufficient working capital can lead to cash flow problems like exceeding overdraft limits or being unable to pay suppliers on time to claim discounts. A business with too little working capital risks being unable to meet its current obligations and may be forced to cease operations even if still profitable. However, tying up too many resources in working capital also means earning a lower than expected return on capital employed, which is also undesirable. The three main components that affect working capital are inventory, receivables, and cash.

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34 views

Inventory 2. Receivable 3. Cash

Managers must pay special attention to working capital because insufficient working capital can lead to cash flow problems like exceeding overdraft limits or being unable to pay suppliers on time to claim discounts. A business with too little working capital risks being unable to meet its current obligations and may be forced to cease operations even if still profitable. However, tying up too many resources in working capital also means earning a lower than expected return on capital employed, which is also undesirable. The three main components that affect working capital are inventory, receivables, and cash.

Uploaded by

uttamsudhir
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Page 6

must also take account of the additional current assets that are usually involved with any
expansion of activity.

Increased production tends to engender a need to hold additional stocks of raw materials
and work in progress. Increased sales usually mean that the level of debtors will increase.
A general increase in the firms scale of operations tends to imply a need for greater levels
of cash.

Then we should know why should the managers of a business pay special attention to
working capital?

Management must ensure that a business has sufficient working capital. Too little will
result in cash flow problems highlighted by an organization exceeding its agreed overdraft
limit, failing to pay suppliers on time and being unable to claim discounts for prompt
payment. In the long run, a business with insufficient working capital will be unable to
meet its current obligations and will be forced to cease trading even if it remains profitable
on paper.

On the other hand, if an organization ties up too much of its resources in working capital it
will earn a lower than expected rate of return on capital employed. Again this is not a
desirable situation.

The three components, which put affects on working capital, are as:
1. Inventory
2. Receivable
3. Cash

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