20-04-2012, 04:20 PM
working capital management
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INTRODUCTION
Working capital management is the process of identifying all aspects of the administration of both current assets and current liabilities. The basic objective of working capital management is to manage the firms current assets and current liabilities in such away that the satisfactory level of working capital is maintained.
For example, the creditors of the firms are interested in receiving the interest on their debt in time and the repayment of the principle amount on maturity. This is not possible for a firm unless its is sufficiently liquid to meet its obligations. As such the creditors of the firm are more interested in knowing the solvency of the firm. The owners, viz. the shareholders, on the other hand, are more interested in knowing the profitability of the company through the return in investment. The management is interested in knowing the efficiency of their working and liquidity position of the firm, its activity and profitability
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The finance manager has to make use of both long time and short time sources of funds in away that the overall cost of working capital is the lowest and the funds are available on time and for the period they are really needed. Working capital management indicates that the problem that arise in attempting to manage the current assets the current liabilities and interrelationships that exists between them.
OBJECTIVES OF FINANCIAL MANAGEMENT
Basic objectives
Traditionally the basic objective of financial management are the maintaining of liquid assets and maximization of profitability of the firm. Maintenance of liquid assets means that the firms have adequate cash in hand to meet its obligations at all times.
Other objectives
The following are the other objectives
• Ensuring a fair return to the share holders.
• Building up reserves for growth and expansion.
• Ensuring maximum operational efficient and effective utilization of finance.
Finance function
Although it may de difficult to separate the finance functions from production marketing and other functions. Yet the functions themselves can be readily identified. The functions of raising funds investing them in assets and distributing return earn from assets to share holders are respectively know as financing investment an dividend decisions while performing these functions a firm attempts to balance cash flows. This is called liquidity decision and we add it to the list of important financial decision include.
• Investment of long-term assets mix decision.
• Financing or capital mix decision
• Dividend or profit allocation decision
• Liquidity or short term mixed decision
A firm performs finance functions simultaneously and continuously in the normal course of business. They do not necessarily occur in sequence. Finance function call for skillful planning control and executive of affirms activities.
Investment decisions:
Investment decision or capital budgeting involves the decisions of allocation of capital of commitment of funds to long term assets. Which would yield benefits in future? Its one very significant aspect is the task of measuring the prospective profitability of new investment. Future benefits see difficult to measure and can not be predicted with certainty because of the uncertain future. Capital budgeting decision involves risk. Besides the decision of recommitting funds an assets becomes profitable or non profitable.
Financing decisions:
Financing decision is the second important function to be performed by the financial manager. Broadly he must decide when and how to acquire funds to meet he firm’s investment needs. The central issue before him is to determine the proportion of equity is known as the firm’s capital structure. The financial manager must strive to obtain the best financing mix of the optimum capital structure of his firm.
Dividend decisions:
Dividend decision is the third major financial decision. The financial manager must decide whether their firm should distribute all profits or retain them or distribute a portion and retain the balance. Like the debt policy the dividend policy should be determined in terms of its impact on shareholders value. The optimum dividend policy is as which is maximized the optimum dividend payout ratio.
Liquidity decisions:
Current assets management which affects a firm’s liquidity is another important finance function in addition to the management of long term assets. Current assets should be managed efficiently for safeguarding the firm’s against the dangers of liquidity and risk. A conflict exists between profitability and liquidity while managing current assets.
The financial manager should develop sound techniques of managing current assets. He should estimate firm’s needs for current assets and make sure the funds would de made available when needed.