Working Capital Management
Working capital management is concerned with the problems that arise in managing current assets (CA), current liabilities (CL) and the interrelationships that exist between them. Business success heavily depends on the ability of financial executives to m
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Working Capital Management
Introduction Working capital management is concerned with the problems that arise in managing current assets (CA), current liabilities (CL) and the interrelationships that exist between them. The term current assets refer to those assets which, in the normal course of business, can be/will be converted into cash within 1 year or length of operating cycle (whichever is longer). The major current assets are cash and bank balances, debtors and inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the normal course of business, within a year. The major current liabilities are creditors, short-term loan and outstanding expenses. Business success heavily depends on the ability of financial executives to effectively manage receivables, inventory and payables (Filbeck and Krueger 2005). While inadequate working capital has the potential to disrupt production/sales operations of otherwise well-run business enterprises, excessive working capital adversely impacts profitability. Therefore, the firms should strive to maintain adequate amount of working capital to ensure smooth production and sales operations. Firms are able to reduce financing costs and/or increase the funds available for expansion by minimising the amount of funds tied up in current assets (Lamberson 1995). The importance of efficient working capital management (WCM) is therefore indisputable. This chapter is a modest attempt to gain insight on the working capital management practices of the sample companies. For better exposition, this chapter has been divided into ten sections. Section I lays down the objective, rationale, scope and methodology of the chapter. Section II contains a brief literature review on aspects related to working capital management. Section III presents aggregative analysis of CA and CL in terms of major liquidity ratios. Disaggregative analysis in terms of management of individual current assets as well as gross working capital cycle has been delineated in section IV. Section V is devoted to the examination of aspects such as creditors’ payment period and net working capital cycle. Other allied aspects relating to working
P.K. Jain et al., Financial Management Practices: An Empirical Study of Indian Corporates, India Studies in Business and Economics, DOI 10.1007/978-81-322-0990-4_5, © Springer India 2013
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Working Capital Management
capital management, say, planning, determination, financing, policy for dealing with situations like its excess/shortage, and so on, constitute the subject matter of section VI. Components of total current assets constitute the subject matter of section VII. The emerging concept of zero working capital and its practice amongst the sample companies is taken up in section VIII. Sector-wise analysis on all aspects of working capital management is presented in section IX. Concluding observations are listed in section X.
Section I
Scope and Methodology
The Bombay Stock Exchange BSE 200 index comprises of the top
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