WORKING CAPITAL 1

• Working Capital


  The difference between current assets and current liabilities
• Working Capital


  A financial measure that calculates whether a company has enough liquid assets to pay its bills that will be due within a year
• Short-term Financial Management


  The administration and control of more liquid resources to ensure sufficiency in covering day-to-day business operations including anticipated contingencies
• Short-term Financial Management


  1. Commitment of funds to various activities within the business

  2. Best possible combination of types of financing

  3. Planning

  4. Organizing

  5. Administration

  6. Control of company activities geared towards profit goals
• Uses and Importance of Working Capital Management

  • Amount of cash on hand in bank to be maintained
  • Amount of credit to be extended to customers
  • Number of days extended to credit customers
  • Amount and type of inventories on stock to be maintained
  • Amount of securities or temporary investments to be made
• Advantages of Adequate Working Capital

  • Maintains solvency of the business
  • Creates and maintains goodwill
  • Enables easy loans on favorable terms
  • Enables cash discounts on purchases
  • Ensures regular supply of raw materials
  • Enables regular payment of salaries, wages, and other day-to-day commitments
  • Enables a concern to face business crisis in emergencies
  • Enables quick and regular return on investments
  • Enables exploitation of favorable market conditions
  • Creates an environment of security, confidence and high morale as well as overall efficiency in a business
• Disadvantages of Inadequate Working Capital

  • May affect inability to pay short term liabilities in time, losing reputation and credit facilities
  • Cannot buy requirements in bulk and cannot avail of discounts
  • Difficult to exploit favorable market conditions and undertake profitable projects
  • Rate of return on investments falls
  • Cannot pay day-to-day expenses of operations, resulting in inefficiencies, increased costs and reduced business profits
• Cash


  A "non-earning" asset that earns no or very little interest
• Cash Management


  The most effective way of handling cash or its equivalent in a manner intended to result in its most efficient use
• Motives of Holding Cash Balances

  • Transaction motive
  • Precautionary motive
  • Speculative motive
• Transaction Motive


  Allows the firm to make payments that arise in the ordinary courses of doing business
• Precautionary Motive


  Provides a buffer stock of liquid assets that can be drawn if there are unexpected demands of cash
• Speculative Motive


  Permits the economic unit to take advantage of the future income producing activities
• Management Responsibilities Relating to Cash

  • To prevent losses from fraud or theft
  • To provide accurate accounting of cash receipts, cash payments and cash balances
  • To maintain enough cash at all times
  • To prevent unnecessary amount of cash from being held idle in bank account which produce no revenue
• Float Management


  Controlling the collection and disbursement of cash
• Float


  Funds that have been dispatched by a payer but not yet in form that can be spent by the payee
• Collection Float


  The time between a payer sends payment and the funds are credited to the payee's bank account
• Disbursement Float


  The time lag between the time when a payer sends payment and when the funds are deducted from the payer's bank account
• Negative Float


  Exists when book balanced exceeds the bank balance
• Book Balance


  The account balance in a company's accounting records, most commonly applied to the balance in a firm's checking account at the end of an accounting period
• Bank Balance


  The ending cash balance appearing on the bank statement for a bank account
• Mail Float


  The delay between the time when payer places payment in the mail and when the payee receives it
• Concentration Banking


  A collection procedure in which payments are made to regionally dispersed collection centers and deposited in local banks for quick clearing
• Lockboxes


  A collection procedure wherein payers sends their payments to a nearby post office box that firm's bank emptied several times daily
• Direct Sends


  A collection procedure in which the payee presents payment checks directly to the banks from which they are drawn, thus reducing clearing float