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Introduction
Working Capital is a financial metric which represents operating liquidity available to a business.
The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
Components of Working Capital
The working capital cycle is made up of four core components:
Cash & Cash equivalent.
Creditors/accounts payable.
Inventory/stock in hand.
Debtors/accounts receivables.
Importance of Working Capital
It is important we work out the right level of working capital you will need. If the working capital is too:
High - Business has surplus funds which are not earning a return; and
Low - May indicate that your business is facing financial difficulties.
To Forecast the optimum working capital requirement the following formula may be used:
(Estimated cost of good sold x Operating cycle) + Desired cash balance.
Operating Cycle, O = R + W + F + D – C
Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.
Working Capital Financing
Fund Based:
Cash Credit
Overdraft
Bills Discounting
Working Capital Demand Loan
Non Fund Based:
Letter of Credit
Bank Guarantee
Structured Product:
Factoring
Commercial Paper
Securitization of receivables
Buyers/Supplier credit.
APL Apollo Tubes Ltd.
Among the 3 top manufacturer of the steel tubes, pipes and hollow sections in India.
Delhi based with 5 manufacturing location at northern, southern and western part of the India with installed capacities ½ Million MTPA.
Despite a slowdown in the Indian economy Company has recorded a gross sales growth of 56% over 2010-11, EBIDTA growth of 26.19% and net profit growth of 13.83%.
Intends to double production capacity to a million tonnes per annum by 2015 and generating revenues worth US$1 billion.
Plan to increase presence in new geographies including Tier II & Tier III cities.