Series 1: Actual working capital requirement, Series 2: Working Capital at 75th percentile.
Adequacy of working capital eases the repayment of loans and dividends to the investors quickly. It is the amount of capital that a business needed to meet its day-to-day operation. A firm which has ample working capital can finance its day-to-day commitments and hence it will create efficiency in the business and improve the overall profits.Companies may have an ideal level of inventories. Turnover of circulating capital: The faster the cash is recovered by the sale of goods will reduce the demand for working capital whereas more working capital is needed in case of slower turnover. Finished goods are sold instantly, no significant stock of finished goods is there at any point of time. It also offers cash credit for which the company has to pay a commitment fees at a low rate and it has to interest only on withdrawal of the money. Brealey, , p. It is the resources required to conduct the daily of core activities of any business setup small businesses, medium businesses or large scale enterprises. Download the full version above. Over-investment in working capital, that is, having a level of working capital which exceeds operational requirements, is a wasteful and inefficient use of funds. This policy presume the risk and profitability is moderate which greater than conservative but lesser than aggressive approaches. It focuses attention to the managing of the current assets, current liability and their relationships that exist between them. Company with sufficient working capital can take advantage of new business opportunity to expand or grow its business and thus prevent the business from failure. Moderate Financing Policy The moderate approach is a middle way between the conservative and aggressive working capital financing approaches.
Seasonal variations: Some businesses produce the goods seasonally only which lead to the requirement of more working capital in order to purchase the raw materials in bulk during the season.
What are components of working capital? Without it, the business will fail.A firm which has ample working capital can finance its day-to-day commitments and hence it will create efficiency in the business and improve the overall profits. The excessive working capital gives rise to speculative transactions which in turn may create more wastage of money or losses for the business. They may be financed by either short-term funding such as current liabilities or by long-term funding such as equity capital. It is the amount of current assets that more than current liabilities. Hence, it is important for managers to ensure relentless efforts towards keeping a sound working capital level in order to optimally achieve organizational goals. The working capital ratio should be optimized as the lower working capital indicates the risk of distraction of operating cycle and the higher working capital means the interest cost is higher. Companies must strike a delicate balance with DPO. For this we may decide that 25th percentile of the working capital requirement should be financed from long term sources. However, the high investment in working capital means increased financing costs that erode profitability Talekar, Lack of responsiveness to customer demands and inventory obsolescence can also cause a lot of problems.
Surplus of cash tempts the managers to expend more and redundancy of working capital may lead to overall inefficiency of the management in the company. Credit policy: The business require large amount of working capital to finance its debtors if purchase the goods on cash basis but sell on credit term.
Aggressive Financing Policy This policy finances the working capital with high risk and high profitability.