Working Capital Literature Review

MINI

PROJECT ON WORKING CAPITAL MANAGEMENT

LETERATURE REVIEW

Generally, working capital refers to a company’s investment in current assets – cash, short-term securities, accounts receivable and inventories. However, for the purposes of working capital management, the more descriptive term is net working capital, which refers to the current assets minus current liabilities, which are typically accounts payable and other obligations due within one year. It is also explained as follows: “Current assets, commonly called working capital, represent the portion of investment that circulates from one form to another in the ordinary conduct of business.” (Gitman,2003). This idea embraces the recurring transaction from cash to inventories

He emphasized that different production techniques require different amount of working capital by affecting goods-in-process because different techniques have differences in the length of production period, the rate of output flow per unit of time and time pattern of value addition. Different techniques would also affect the stock of raw materials and finished goods, by affecting lead-time, optimum lot size and marketing lag of output disposals. He, therefore, hypothesised that choice of production technique could reduce the working capital needs. He estimated the ratio of work-in-progress and working capital to gross output and net output in textile weaving done during 1960, on the basis of detailed discussions with the producers and not on the basis of balance sheets which might include speculative figures. His study could not show significant relationship between choice of technique and working capital. However, he pointed out that the idea could be tested in some other industries like machine tools, ship building etc. by taking more appropriate ratios representing production technique

such firms with high earning capacity may generate cash operations and contribute to their working capital. The dividend policy of a concern is also influence the requirements of its working capital. A firm that maintains a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.

12) Other factors:

Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, etc. also influence the requirements of working capital. FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS

The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operation etc. it is not possible to rank them because all such factors are of great importance and individual factors changes a firm overtime. However, the important factors generally influencing the working capital requirements