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Working Capital Management

1) The document discusses the importance of working capital management for businesses operating in an uncertain real world with transaction costs and imperfect information. 2) It defines working capital as the excess of current assets over current liabilities, which is the difference between a company's short-term assets and short-term debts. 3) The goal of working capital management is to ensure a company has sufficient liquidity to meet short-term operational expenses and debt obligations, while avoiding excess idle funds or inadequate capital that could hurt operations.

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Shodhan Rai
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56 views

Working Capital Management

1) The document discusses the importance of working capital management for businesses operating in an uncertain real world with transaction costs and imperfect information. 2) It defines working capital as the excess of current assets over current liabilities, which is the difference between a company's short-term assets and short-term debts. 3) The goal of working capital management is to ensure a company has sufficient liquidity to meet short-term operational expenses and debt obligations, while avoiding excess idle funds or inadequate capital that could hurt operations.

Uploaded by

Shodhan Rai
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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WORKING CAPITAL MANAGEMENT

INTRODUCTION: In the perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction search costs, scheduling costs, or production and technology constraints. The unit cost of production would not vary with the quality produced. Borrowing and lending rates shell be same. Capital, labour, and products market shell be perfectly competitive and would reflect all available information, thus is such an environment, there would be no advantage for investing in short term assets. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own product and those of suppliers. There are transaction cost for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed, there are spreads between the borrowings and lending rates for investments abd financing of equal risks. Similarly each organization is faced with its own limits on the production goods. In other words, the market in which real firm operated are not perfectly competitive. These real world circumstances introduce problems which require the necessity of maintaining working capital. For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial imputes in future at reasonable price. This may necessitate the holding of inventory. Current assets. Similarly an organization may be faced with an uncertainty regarding the level of its future cash flows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of reserve of short term marketable securities, again a short term marketable securities, again a short term capital asset. WORKING CAPITAL In simple words working capital is the ex cess of current Assets over c u r r e n t liabilities. Working capital has ordinarily been defined as the excess of current assets over current liabilities. Working capital is the heart of the business. If it is weak business cannot proper and survives. It is therefore said the fate of large scale investment in fixed assets is often determined by a relatively small amount of current assets. As the working capital is important to the company is important to keep adequate working capital with t h e c o m p a n y. C a s h i s t h e l i f e l i n e o f c o m p a n y. I f t h i s l i f e l i n e d e t e r i o r a t e s s o d o e s t h e companys ability to fund operation, reinvest do meet capital requirements and payment. Understanding Companys cash flow health is essential to making investment decision. A g o o d w a y t o j u d g e a c o m p a n y s c a s h f l o w p r o s p e c t s i s t o l o o k a t i t s w o r k i n g c a p i t a l management. The company must have adequate working capital a s much as needed by the company. It should neither be excessive or nor inadequate. Excessive workingcapitalc u i s s e s f o r i d l e f u n d s l y i n g w i t h t h e f i r m w i t h o u t e a r n i n g a n y p r o f i t , w h e r e a s inadequate working capital shows the comp

a n y d o e s n t h a v e s u f f i c i e n t f u n d s f o r financing its daily needs working capital management involves study of the relationship Between firms current assets and current liabilities. The goal of worki n g c a p i t a l management is to ensure that a firm is able to continue its operation. And that is has s u f f i c i e n t a b i l i t y t o s a t i s f y b o t h m a t u r i n g s h o r t t e r m d e b t a n d u p c o m i n g o p e r a t i o n a l expenses. The better a company managers its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure the those surpluses are invested in ways that will generate suitable returns for investors.

WORKING CAPITAL CYCLE

EQUITY & LOAN

CASH PAYABLES

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