Working capital- Determinants

Working capital refers to that part of firm’s capital that is required to finance current assets of the company such as marketable securities, debtors, inventories and cash. Working capital comprises of funds that is used for wages, salaries and day to day expenses of the enterprise.
Working capital holds a very important place in the enterprise and must be planned carefully and strategically so to avoid unnecessary outlay of funds and simultaneously optimize profits.



Nature of the business
Financial firms and trading firms requires less working capital as funds are not tied to inventories. Whereas manufacturing concerns need large working capital to finance inventories to carry out the production cycle smoothly.

Scale of Business
Working capital is also determined by the scale of business and its turnover. Small scale business requires very less working capital when compared to the large scale businesses and Giant concerns. One has to determine such activities of the concern before making provisions for the working capital requirements.
Production Policy
Production depends on various factors like seasonal fluctuations, availability of raw materials etc. If production carries out continuously throughout the year then it would demand high working capital. Whereas in business where production is carried out seasonally, less working capital is tied up.

Rate of Stock turnover
High rolling stocks helps in realization of sales money whereby reducing the additional requirement of working capital. Dead Stocks and low turnover results in large sum of funds to get tied up.

Working capital cycle
It is the cycle that begins from purchase of raw materials to realization of cash after sales. It includes phases like work in progress, finished goods and sales of finished goods. The larger the cycle more would be working capital needs.


Credit Policy
It is often defined as terms of sales and purchase. An enterprise purchasing raw materials in cash and selling out finished goods on credit will require more working capital when compared to enterprise purchasing raw materials on credit and finished goods in cash.
Length of credit also has a substantial bearing over working capital requirements.

Synchronizing and correlating such factors and estimating their trade offs have helped large organization to grow as giants.

Few Tips on Maintaining Cash for your business..

In my previous article, I have tried to depict a detailed discussion up on needs of cash management. We have seen tactful management of cash can have a substantial impact upon profitability of an entity. However, the question of effective cash management rests in efficient maintenance of cash at an sustainable level. Further its also facilitates in better working capital management & accordingly improves the current ratio to define the financial stability of the business.

In recent times, major economic instability across the countries & as the recessionary roll outs ruthlessly in almost every industries, most of the small as well as middle scale business units are finding hard to cope up the financial curse & hence many of them are already winded up & rests are running short of fund. Henceforth, it is crucial concern for every business organization to work out a initial feasibility over the average maintainable level of cash requirements. However, these words doesn't have much value for an entity already in disaster. Henceforth, it will be better of to discuss upon few revival remedies for a staggering concern to get rid of financial rigidity.

For every business entity, the relative strength of available cash & cash equivalents reflects in current ratio. Accordingly, to maintain a healthy current ratio, sufficient amount of liquidity must be put in to business. However, if the available cash & cash equivalents are lagging behind the least requirements, then need to work out upon alternative options. Firstly, as all of us commonly do in time of crisis, evaluate the extent of scraps in process & non performing fixed assets & sale of accordingly to feed your financial needs. Also one need to console his operating activity as per the current economic circumstances where the demand in in downturn day by day. It will further help to bring down the working capital needs. However, it is not always easy to change the level of operational activities due to prospective impact upon cost effectiveness more precisely for big production houses. Secondly, if the above options are not sufficient enough to satisfy the severity, further steps can be taken in negotiation with creditors & debtors. Ask for longer credit period from the creditors as far as possible so also to debtors by keeping a constant track with them & make them to pay at their earliest. Also, if there is any negotiable instruments in hand, these can be easily discounted through any banks. Apart from these, non performing assets like doubtful debtors etc can be discharged off at a discounted value through some agencies & institutions deals in such. Thirdly, taking a term loan is a good option provided the business has the capability to cope up with that. For a public company, further fund can be raised through IPO's & right issues etc. Although, in recent terms I don't think there will be enough response in such practices. Fourthly, federal government of most of the countries in economic dire, offers several revival packages & grants to safeguard the business functions of every scale. As such, before taking off the entire activities, it will be apprehensive for every busines concen to evaluate these options wisely.

Few Tips on Effective MANAGEMENT of business CASH..

Cash maintanence & management are the crusial consideration for every concerned undertakings. To continue the regular course of operation for a business unit adiquate maintanence of cash as well as effective utilisation of excessive or idle cash is essential. For any business undertakings, irrespective of self propritorship or partnership or a company, excessive funding over estimated project cost amounts in to loss of opportunity cost & also increases cost of capital. Henceforth, it is importent to evaluate the requirement of liquid cash or cash equvallent to carry on the business function in terms of adiquate provision for bad debt, relation with creditor, market stability for the products in process, availability of the factors of production, current economic condition & political situations etc. However, so far I have discussed upon effects of inefficient cash management. Let's find out few techniques of tactful cash management.

Firstly, if you find your business is fueled with excessive funding the easiest way for a self propritorship or partnership firm is to take out the excess amount on account of dreawings.However, for big corporate houses (private & public companies) this procedure is a bit complicated. Here disbursment of excessive fund is termes as capital reduction. It is commonly practised through buy back of shares in complience with the respective governing act.

Secondly, in most of the cases & mainly corporate houses maintain a portion of their liquid fund in relatively illliquid invesment portfolio. It also helps them to diversify their source of income as well as appreciate balance aheet figures. Another prospectful aspect of this practise is that it facilitates in quick availability of fund as per requirement. In many times, holding company's stake in subsuderies also comprise of these excess funds.

Thirdly & most commonly major corporate houses often discharged off excess liquidity in terms of higher divident payouts. It also helps in inflating the equity value in the capital market.

Lastly, excessive cash is favorable for a business to the extent of it's effective utilisation. Henceforth, additional fund can be deployed in to business diversifications. As such, in recent days business diversification is a quite handy tool for better business promotion.