Non-current, or fixed, assets yield returns over a period of time. These, typically, are buildings for the factory and offices along with the appurtenances, fmtures and facilities therein, machinery, etc. The cost of using them for the purposes of business is computed based on annualised costing, say, through capital recovery computations, or by other methods in current practice. However, the f m has also to employ short-term assets and resources of financing for the day-to-day activities. The management of such assets is called WORKING CAPITAL (WC) MANAGEMENT, or CURRENT ASSETS,MANAGEMENT.
Like long-term capital employed in the business through appropriate decision-making processes, decisions on working capital too are based on analysis of the effects oflon risk and profitability. Whereas the benefits from fixed assets continue over a long time, the working capital, or current assets, or stock-in-trade, is a short-term asset going through conversions fairly quickly within a short period, say, a year. Thus, CURRENT ASSETS (adjusted for current liabilities) QUALIFY AS WORKING CAPITAL..If the quantum of current assets is large, the liquidity status of the firm is fairly good but profitability would decrease since these assets would remain idle for a larger part of the duration; however, thefirm's business is under relatively less risk. On the other hand, if current assets held are small, thefinn operates under greater risk, since its liquidity position is adversely affected; yet, the profitability of the current assets would increase. Viewed in this framework of the operations of the firm, management of working capital would imply attending to the effects on profitability and liquidity alongwith the related aspect of risk in the quantum (i.e. liquidity) of the current assets. More briefly, working capital management is premised on trade-off between profitability and risk for different levels of liquidity.
We may recall on what constitutes "current" in this instance. Working capital comprises the net balance between current assets and current liabilities. Management of WC is based on the inter-relationships between these components.As defined in earlier occasions (in other BlocksNnits), current assets are those assets which, in the ordinary course of business, are convertible into cash in a short duration,generally taken as a year, without diminution in value and without disrupting the operations of the firm. Cash (including bank balances), marketable securities, accounts receivable and inventory (in decreasing order of quickness of convertibility) comprise the current assets.
As defined again in earlier occasions, current liabilities are those liabilities that are intended to be paid in the ordinary course of business, within a year, out of the current assets and/or the earnings of the firm. Included in this are : accounts payable, bills payable, bank over-draft, outstanding expenses, etc.WC management is the attempt at managing the firm's current assets and current liabilities in such a way that an adequate level of WC is maintained. If such is not maintained, the firm cannot meet its immediate obligations and will, at least technically,become insolvent and may even be forced into bankruptcy. WC available should be with enough margin for meeting the immediate obligations.
Like long-term capital employed in the business through appropriate decision-making processes, decisions on working capital too are based on analysis of the effects oflon risk and profitability. Whereas the benefits from fixed assets continue over a long time, the working capital, or current assets, or stock-in-trade, is a short-term asset going through conversions fairly quickly within a short period, say, a year. Thus, CURRENT ASSETS (adjusted for current liabilities) QUALIFY AS WORKING CAPITAL..If the quantum of current assets is large, the liquidity status of the firm is fairly good but profitability would decrease since these assets would remain idle for a larger part of the duration; however, thefirm's business is under relatively less risk. On the other hand, if current assets held are small, thefinn operates under greater risk, since its liquidity position is adversely affected; yet, the profitability of the current assets would increase. Viewed in this framework of the operations of the firm, management of working capital would imply attending to the effects on profitability and liquidity alongwith the related aspect of risk in the quantum (i.e. liquidity) of the current assets. More briefly, working capital management is premised on trade-off between profitability and risk for different levels of liquidity.
We may recall on what constitutes "current" in this instance. Working capital comprises the net balance between current assets and current liabilities. Management of WC is based on the inter-relationships between these components.As defined in earlier occasions (in other BlocksNnits), current assets are those assets which, in the ordinary course of business, are convertible into cash in a short duration,generally taken as a year, without diminution in value and without disrupting the operations of the firm. Cash (including bank balances), marketable securities, accounts receivable and inventory (in decreasing order of quickness of convertibility) comprise the current assets.
As defined again in earlier occasions, current liabilities are those liabilities that are intended to be paid in the ordinary course of business, within a year, out of the current assets and/or the earnings of the firm. Included in this are : accounts payable, bills payable, bank over-draft, outstanding expenses, etc.WC management is the attempt at managing the firm's current assets and current liabilities in such a way that an adequate level of WC is maintained. If such is not maintained, the firm cannot meet its immediate obligations and will, at least technically,become insolvent and may even be forced into bankruptcy. WC available should be with enough margin for meeting the immediate obligations.
The study attempts to seek and maintain the optimum level of current assets -and to analyse the trade-off between profitability and risk associated with the maintained levels of current assets and liabilities. Incidentally therein, appropriate financial-mix strategies and the methodologies for management of the components of the current assets are also studied.
Objectives
After studying this unit, you should be able to
Objectives
After studying this unit, you should be able to
- appreciate the underlying concept, together with its importance, of trade-off between profitability and risk for different levels of liquidity,
- estimate WC requirements (in its three components),
- relate the determinants controlling the needs and quanta of WC (in its three components),
- understand the strategies in these respects, and
- have an insight into selective inventory management and the inventory models.
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