Importance:: Running Follows

Working capital: Working capital is a measure of a company's liquidity, efficiency and its short-term financial health.
It
is the capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the
current liabilities. Current assets include cash, marketable securities, inventory, accounts receivable and other short-
term assets to be used within the year. Current liabilities include accounts payable and the current portion of long-
term debt. These are debts that are due within the year. The difference between the two represents the company's
short-term need for, or surplus of, cash. A positive working capital balance means current assets cover current
liabilities which indicate company is able to pay off its short-term liabilities almost immediately. A negative working
capital balance means current liabilities are more than current assets, generally indicate a company is unable to do
so
Importance: Working capital is the life blood and nerve center of business. Working capital is very essential to
maintain smooth running of a business. No business can run successfully without an adequate amount of
working capital. The main advantages or importance of working capital are as follows:
1. Strengthen The Solvency
Working capital helps to operate the business smoothly without any financial problem for making the payment
of short-term liabilities.
2. Enhance Goodwill
Sufficient working capital enables a business concern to make prompt payments and hence helps in creating
and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid
on time.
3. Easy Obtaining Loan
A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks and
financial institutions in easy and favorable terms.
4. Regular Supply Of Raw Material
Quick payment of credit purchase of raw materials ensures the regular supply of raw materials fro suppliers.
Suppliers are satisfied by the payment on time. It ensures regular supply of raw materials and continuous
production.
5. Smooth Business Operation
Working capital is really a life blood of any business organization which maintains the firm in well condition. Any
day to day financial requirement can be met without any shortage of fund. All expenses and current liabilities
are paid on time.
6. Ability To Face Crisis
Adequate working capital enables a firm to face business crisis in emergencies such as depression.
7 Div: payment.: working capital is needed to pay a dividend to the shareholders. It may take place on a yearly
or half yearly basis.
Components:
1.Cash. Cash is one of the most liquid and important components of working capital. Holding cash involves
cost because the worth of cash held, after a year will be less than the value of cash as on today. Excess of
cash balance should not be kept in business because cash is a non-earning asset.
2. A/c receivable: Accounts receivable are revenues due what is owed to a company by its customers for
sales made. Timely, efficient collection of accounts receivable is essential to a company's smooth financial
operation. Accounts receivable are listed as assets on a company's balance sheet, but they are not actually
assets until they are collected.
3. a/c payable: Accounts payable, the money that a company is obligated to pay out over the short term, is also
a key component of working capital management. Companies seek to strike a balance between maintaining
maximum cash flow by delaying payments as long as is reasonably possible and the need to maintain positive
credit ratings and good relationships with suppliers and creditors.
4. Inventories: Inventories include raw material, WIP (work in progress) and finished goods. Where excessive
stocks can place a heavy burden on the cash resources of a business, insufficient stocks can result in reduced
sales, delays for customers etc. Inventory management involves the control of assets that are produced to be
sold in the normal course of business
Determinants Of Working Capital

Requirements Of working capital depend upon various factors such as nature of business, size of business, the
flow of business activities. However, small organization relatively needs lesser working capital than the
big business organization. Following are the factors which affect the working capital of a firm:
There are a number of determinants of working capital, which include the following:
1.Credit policy. If a business offers easy credit terms to its customers, the company is investing in accounts
receivable that may be outstanding for a long time. This investment can be reduced by tightening the credit
policy, but doing so may drive away some customers.
2.Growth rate. If a business is growing at a rapid rate, it is likely increasing its investments in receivables and
inventory. Unless profits are extremely high, it is unlikely that the entity can generate sufficient cash to pay for
these receivables and inventory, resulting in a steady increase in working capital. Conversely, if a business is
shrinking, its working capital requirements will also decline, which spins off excess cash.
3.Payables payment terms. If a company can negotiate longer payment terms with its suppliers, it can reduce
the amount of investment needed in working capital, essentially by obtaining a free loan from its suppliers.
Conversely, short payment terms reduce this source of cash, which increases the working capital balance.
4.Production process flow. If a company estimates its production needs, what it manufactures will likely vary
somewhat from actual demand, resulting in an excess amount of inventory on hand. Conversely, a just-in-time
system produces goods only to order, so the investment in inventory is reduced.
5.Seasonality. If a company sells most of its goods at one time of the year, it may need to build its inventory
asset in advance of the selling season. This investment in inventory can be reduced by outsourcing work or
paying overtime to manufacture goods at the last minute.
Factors influencing Inventory Management:

1. Type of Product: Among the factors influencing inventory management and control, the
type of product is fundamental. If the materials used in the manufacture of the product
have a high unit value when purchased, a much closer control is usually in order.
2. Type of Manufacture : Besides the type of product, type of manufacture also influences
inventory management and control. Where continuous manufacture is employed, the
rate of production is the key factor. Here, inventory control is of major importance and
in reality controls the production of the product. The economic advantage of this type of
manufacture is the uninterrupted operation of the machines and assembly lines in the
plant.
3. Volume The volume of product to be made as represented by the rate of production

may have little effect on the complexity of the inventory problem. Literally, millions of
brass bases for light bulbs are manufactured each month involving the control of only
two principal items of raw material inventory. On the other hand, the manufacture of a
large locomotive involves the planning and control of thousands of items of inventory
4. The other factors are
1. The objectives of the company as they relate to inventories and the level of services
to be provided to customers.
2. The qualification of staff personnel who will design and co-ordinate the
implementation of the system.
3. The capabilities of personnel who will be responsible for managing the system on a
continuing basis.
4. The nature and size of inventories and their relationship to the other functions in the
company, such as manufacturing, finance and marketing.
5. The capability of present and future data processing equipment.
6. The potential savings that might be anticipated from improved control of inventories.
7. The current or potential, availability of data that can be used in controlling

inventories.
8. The present method for controlling inventories and for making inventory decisions.
9. The degree of commitment by management personnel to the development of a more

effective inventory management system and the results they anticipate from such a
system.
EOQ: Economic Order Quantity, better known as EOQ, is a mathematical tool for determining the
order quantity that minimizes the costs of ordering and holding inventory. The goal is to minimize
total inventory cost. Inventory costs are made up of Holding and ordering cost.
Benefits:
Constant or uniform demand: The demand or usage is even through-out the period
Known demand or usage: Demand or usage for a given period is known i.e. deterministic
Constant unit price: Per unit price of material does not change and is constant irrespective of the
order size
Constant Carrying Costs: The cost of carrying is a fixed percentage of the average value of
inventory
Constant ordering cost: Cost per order is constant whatever be the size of the order
JIT: In a just-in-time (or JIT) production system, raw materials and parts are purchased or produced
just in time to be used at each stage of the production process. This approach to inventory and
production management brings considerable cost savings from reduced inventory levels.

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Working capital: Working capital is a measure of a company's liquidity, efficiency and its short-term financial health.

1. Strengthen The Solvency

3. Easy Obtaining Loan

4. Regular Supply Of Raw Material

5. Smooth Business Operation

6. Ability To Face Crisis

Determinants Of Working Capital

Factors influencing Inventory Management:

3. Volume The volume of product to be made as represented by the rate of production

4. The other factors are

5. The capability of present and future data processing equipment.

7. The current or potential, availability of data that can be used in controlling

9. The degree of commitment by management personnel to the development of a more

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