WORKING CAPITAL MANAGEMENT

Working Capital Management

Working Capital Management

Introduction

Working Capital is well thought-out to be the life giving force for any economic unit and therefore; its management is categorized among the most important functions of corporate management. Every organization, whether profit oriented or non profit, and irrespective of size and nature of business, requires a sufficient amount of working capital for the operations of the business. The management of such resources is considered as the most critical factor for maintaining liquidity, solvency, continued existence and profitability of the business. Furthermore, efficient management of working capital may be important to create value for the shareholders (Narware, 2004, 120).

Inventories are a link between production and sale of a product. As we know there are three types of these, what are the inventory of raw materials, goods in the process and finished products. The inventory of raw materials provides the company flexibility in its purchasing, inventory of finished goods allows the organization greater flexibility in the scheduling of its production and its marketing. The accounting control is necessary to provide a basis for the role of planning also to ensure that cash is used for purposes specific to the company and not wasted, poorly invested or stolen. The administration is responsible for internal control and that the protection of all assets of the company (Chowdhury, 2007, 75).

In the event of fundamental changes within the organization, outside support is often essential. The application of advanced measures (reorganization) and the establishment of implementation structures can be assigned to project managers. They ensure streamlined processes of change minimize internal resistance and implement work processes more efficient.

Working Capital Management

Working capital management efficiency is imperative for firms specifically in the manufacturing sector, where a major part of assets is composed of current assets. This may therefore; directly affect the profitability and liquidity of firms. Firms are likely to fail and may face bankruptcy where working capital management is not given due consideration. Excessive levels of current assets may result in low levels of returns such as return on investment (ROI) for firms. In contrast, firms with a lesser amount of current assets might be facing difficulties in maintaining smooth operations (Raheman, 2007, 53).

One of the major functions of manufacturing firms is the production of goods. This function in most firms depends largely on the Working Capital Management. Management of fixed assets falls within the realm of capital budgeting while the management of Working Capital is a continuing function which involves control and flow of financial resources circulating in the firm in one form or the other. Regarding individual items of working capital, if the forecast of a firm is perfect than it would be holding optimal level of cash required for making payments, adequate inventories for meeting the production and sale requirements and the amount of accounts receivable as per the optimal credit policy.

An optimal level of holdings of such individual current assets will lead to profit maximization for the firm. However, any of the investment above the optimum level ...