Hi! i am Amar MBA IIyear student can you tell me how the working capital use in company or in public sector rgds, amar 09860412676
From India , Hyderabad
hi
this is khaja
working capital main use in any company is maintain and controlling the short term goals (exp) of the company.it controlling the one year or below 12 months exp of the company.it creates cash flow among hte sector in short run.capital funds for long run and provide amount to caspital exp as well as working capital controlling short run exp.ok


Hi Amar,

Working capital is essentially the difference between current assets and current liabilities. There are two broad sources of capital - fixed capital represented by investments made in fixed assets like plant, machinery, land, buildings, furniture, etc. Working capital, on the other hand, is for short term and is used for meeting regular operating expenditures or commitments to suppliers, government dues, other short term liabilities.

Efficiency of working capital is judged using following ratios--

1) Current Ratio

2) Liquid Ratio ( Acid Test Ratio)

3) Sales to Working Capital Ratio

4) Finished Goods Turnover

5) Cash to Average Daily Cost Of Sales

5) Bank Finance as % of Working Capital

Working capital management is the most critical issue in any company. Companies have seasonality in their sales or revenues find it much more challenging to meet liquidity requirements compared to firms have non-seasonal businesses.

Financing working capital is yet another aspect of working capital management. There are various ways of financing it-trade credit, bank finance, cash credit, overdraft, export financing ( letter of credit), bank guarantees. As per RBI guidelines, working capital loans are granted on the basis of certain calculations/ analysis submitted by companies to banks/ financial institutions. The format in which these reports are given are as per - CMA format, and the financing methodology is known as Maximum Permissible Bank Finance ( MPBF). Please try to read more details of MPBF.

Note: Please try to meet some bankers to actually understand the process of working capital financing and see on what basis they consider financing a company for meeting their working capital requirements.

Hope you find the above explanation useful.

Best Regards,

Sameer U.Sakharkar

From India , Mumbai
Hi Amar,

Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Hope this will slove u'r doubt.

From India , Bangalore
hey working capital is required to support the fixed assets of the company.as such if the fixed assets of the firm will not be supported by adequate amount of working cap. the overall productivity of the company will go down .This in turn will lead to decline in profitablility of the firm.

A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors.
1. Nature of business
2. Seasonality of operations
3. Production cycle
4. Production policy
5. Credit Policy
6. Market conditions
7. Conditions of supply
Nature of Business: The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exists no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower.
Seasonality of Operations:
If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low.
Production Cycle:
The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa.
Production Policy:
The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., The production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season.
Credit Policy:
The level of the working capital is also determined by the credit policy, as the firm’s credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the company’s credit policy does not allow it to extend credit to the buyers.
Market Conditions:
The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements.
Conditions of Supply:
The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of working capital.

From India , Mumbai
Will you please let me know How are Net working capital, liquidity, technical insolvency and risk are related?
From India , Ahmadabad
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