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What is the importance of working capital for a manufacturing firm?
DaisyMasangano
Working capital is the life blood and nerve centre of a business. No business can be run successfully without adequate amount of working capital. The advantages of maintaining adequate working capital are as follows:
Continuous Production: Adequate working capital ensures regular supply of raw materials and continuous production.
Solvency and Goodwill: Adequate working capital enables prompt payment to creditors. This helps in creating and maintaining goodwill.
Easy Loans: A concern having sufficient working capital enjoys high liquidity and good credit standing. Hence it can secure loans from banks and others on easy and favorable terms.
Cash Discounts: Adequate working capital enables a concern to avail cash discounts on the purchases, leading to a reduction in costs.
Regular Payment of Expenses: A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments. Such prompt payment raises the morale of employees and increases their efficiency. As a result, costs are minimized and profit increases.
Exploitation of Market Conditions: A concern with adequate working capital can exploit favorable market conditions. It can buy its requirements of raw materials in bulk when the market price is lower. Similarly, it can hold stock of finished goods to realise better prices.
: Adequate working capital enables a concern to face business crisis such as depression because during such periods there is much pressure on working capital.
High Return on Investments: Adequacy of working capital facilitates continuous production and effective utilization of fixed assets. Because of this, the concern is able to generate more profits and ensure higher return on investments.
-By Kuldeep B. Shukla
Wiki User
∙ 10y ago
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Why does a firm need to maintain an adequate amount of working capital?
An adequate amount of working capital is needed within a firm so that everyday expenses can be taken care of. Electric bills, payroll, and rental payments have to be paid to keep a firm in business.
What factors a financial manager consider while estimating working capital requirements of a firm?
There are many factors that a financial manager will consider while estimating working capital requirements of a firm. The main factors will include the availability of resources and the returns it will bring to the firm.
What is temporary and permanent working capital?
Permanent working capital is the minimum investment in the form of inventory of raw materials, work-in-progress, finished goods, stores and book debs to facilitate uninterrupted operation in a firm. This minimum level is called the permanent or working capital.It is permanent like the firm's fixed assets are. Over and above this, the firm's working capital requirements fluctuate depending upon the cyclicality and seasonality of product demands. The is referred to as the variable or fluctuating or temporary working capital.
What is the Importance of investors in a firm?
Investors provides the funds (business capital) which the company uses to operate. With no investors there is no business.
Trade credit may be used to finance a major part of the firm's working capital when?
the firm extends less liberal credit terms than the supplier.
How a firm increase its working capital?
Firm can increase it's working capital by issuing more capital to public or by getting shore term loan from market.
Explain the factors detemimining working capital requirements of a firm?
The nature of the business, seasonality of production and the production cycles are some of the factors that determine the working capital requirements of a firm.
What is working capital and what factors affect the size of working capital in an enterprise?
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:1. Size Of BusinessWorking capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital.2. Nature Of BusinessWorking capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital.3. Storage Time Or Processing PeriodTime needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress.4. Credit PeriodCredit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital.5. Seasonal RequirementIn certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements.6. Potential Growth Or Expansion Of BusinessIf the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business.7. Changes In Price LevelChange in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets.8. Dividend PolicyThe dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital.9. Access To Money MarketIf a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital.10. Working Capital CycleWhen the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital.11. Operating EfficiencyThe operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.
What stream of income is not affected by how a firm is financed?
Net Working Capital
Why does a firm need to maintain an adequate amount of working capital?
An adequate amount of working capital is needed within a firm so that everyday expenses can be taken care of. Electric bills, payroll, and rental payments have to be paid to keep a firm in business.
What factors a financial manager consider while estimating working capital requirements of a firm?
There are many factors that a financial manager will consider while estimating working capital requirements of a firm. The main factors will include the availability of resources and the returns it will bring to the firm.
What are the different methods of estimating working capital requirement of a firm?
There are two main methods of estimating working capital within a firm. These include the conventional method which measures cash flow, and the concept of operating cycle.
What is temporary and permanent working capital?
Permanent working capital is the minimum investment in the form of inventory of raw materials, work-in-progress, finished goods, stores and book debs to facilitate uninterrupted operation in a firm. This minimum level is called the permanent or working capital.It is permanent like the firm's fixed assets are. Over and above this, the firm's working capital requirements fluctuate depending upon the cyclicality and seasonality of product demands. The is referred to as the variable or fluctuating or temporary working capital.
How should the working capital requirement of a firm be financed?
There are many ways of funding the working capital of a business: * Overdraft * Loan * Equity * Invoice discounting or factoring
What happens if a company over invests in net working capital?
If a firm over invest in net working capital, it incurs cost in the form of opportunity cost.
Determinants of working capital?
Q- DETERMINANTS OF WORKING CAPITALThere are lots of factor of determinants of working capital1) Nature of business - working capital requirement of a firm basically influenced by the nature of its business trading and financial forms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retails stores, for example must carry large stock of a verity of good to satisfy varied and continuous demand of their customer.2) Market and demand condition - the working company related to its sales . it is difficult to precisely determine the relationship between the volume of sales and working capital need. Current assets will have to be employed before growth takes place. Then necessary to make planning of working capital for a growing firm on a continuous basis3) Technology and manufacturing policy - the manufacturing cycle comprise of the purchase and use of raw material and the production of finished goods. Longer the manufacture cycle, larger will be the firm's working capital requirement. For example, the manufacturing cycle in the case of a boiler, depending on its size, may range between six to twenty four month. On the other hand the manufacturing cycle of product such as detergent powder, soap, ice creams etc. may be a few hour extend product take a large time4) Credit policyof the firm affect the working capital by influencing the level of debtor. The credit term to be guaranteed to customer may depend upon the norm of the industry to which the firm belong. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practice. The firm should use discretion in granting credit term to us customer5) Operating efficiency - the operating efficiency of the firm relates to the optimum utilization of all its resource at minimum costs. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization improves profitability and helps the releasing on working capital6) Conditions of supply: the inventory of raw material, spares and stores depends on the conditions of supply. if the supply is prompt and adequate, the firm can manage with small inventory. however, if the supply is unpredictable and scant then the firm, to ensure continuity of production, a similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year
What are the objectives of working capital management?
Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.
