Working capital decisions, Managerial Accounting

The decisions about long-term investment are depends on judgments on future cash flows, the improbability of such cash flows and the opportunity cost also of the funds to be invested. In so far as working capital management decisions are related the underlying criteria are similar but, there is a raised focus on liquidity and management of operating cycle. Operating cycle terms to the time this takes to exchange current assets as excluding cash in cash. The operating cycle in part finds out how long it gets for a firm to produce cash from current assets and thus the risk and cost of its investment in working capital or current assets. Working capital is the capital which can be instantly put to work to make the benefits of capital investment. Working capital is also termed as circulating or current capital.

The main difference among long and short-term financial management i.e. also considered as working capital management is about quantum and frequency of cash flows. The amount of funds dedicated are generally large and one off decision in case of long-term financial management whereas, in case of short term financing the amount of funds offer are relatively tiny and frequently repetitive in nature. The impact of long term financing ranges over an extended period of time generally 15 to 20 years or more, while, the impact of short term financing is inside the operating cycle generally ranging from three months to a year.

Two concepts of working capital are as:

(i) Gross working capital

(ii) Net working capital

The gross working capital is the sum of all current assets. Net working capital is the diversity between current liabilities and assets. The constituents of working capital are demonstrated in Table no.1. Part A of this table demonstrates current assets and part B of this table demonstrates current liabilities.

                  Table no.: Constituents of current assets and current liabilities

Part A

Part B

Current Assets

Cash and Bank Balances

Inventories

Raw material and components, work in progress/process (WIP) finished goods, trade debtors, loans and advances, investments, pre-paid expenses

Current Liabilities Sundry Creditors Trade Advances

Borrowings (short term) Outstanding expenses

Taxes and dividends payable,

Other liabilities maturing within a year

This section deals along with specific aspects and considerations concerned to overall working capital management and is separated in the subsequent sections:

  • Factors influencing working capital needs
  • Characteristics of current assets
  • Levels of current assets
  • Profit criterion for current assets
  • Current assets financing policy
  • Resource of working capital finance
  • Approaches to bank financing
  • Impact of inflation on working capital
  • Operating cycle analysis
  • Processes for estimating working capital needs
Posted Date: 4/9/2013 2:48:44 AM | Location : United States







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