Eric Samek Brasa – Amazing Value..

Eric Samek Brasa

What is working Capital? In a business it can be explained as its current assets less its current liabilities. Current assets comprise cash, stocks of raw materials, work in progress & finished goods, marketable securities including Treasury bills & amounts receivable from from debtors. Current liabilities comprise creditors falling due within one year, & may include amounts owned to trade creditors, taxation payable, dividend payments due, short term loans, long-term debts maturing within 1 year & so on.

Every business needs adequate liquid resources to keep everyday cashflow. It requires enough to pay wages & salaries because they fall due & enough to pay for creditors should it be to keep its workforce & ensure its supplies. Maintaining adequate working working capital is not only important for the short term. Sufficient liquidity should be maintained to guarantee the survival from the business eventually too. A profitable company may fail if this lacks adequate cash flow to satisfy its liabilities as they fall due.

What exactly is Working Capital Management? Make certain that sufficient liquid resources are maintained is dependent on capital management. This involves achieving a balance in between the requirement to minimize the risk of insolvency and the requirement to increase the return on assets .An excessively conservative approach leading to high amounts of cash holding will harm profits because the opportunity to produce a return on the assets tide up as cash could have been missed.

The amount of Current Assets Required. The volume of current assets required will depend on the nature of the company business. As an example, a manufacturing company might require more stocks than company in a service industry. Since the volume of output with a company increases, the amount of current assets required may also increase.

Even assuming efficient stock holdings, debt collection procedures & cash management, there exists still a certain amount of choice in the total volume of current assets required to meet output requirement. Policies of low stock-holding levels, tight credit & minimum cash holding could be contrasted with policies of high stock (To enable for safety or buffer stocks) easier credit & sizable cash holding (For precautionary reasons).

Over-Capitalization. If you can find excessive stocks debtors & cash & not many creditors there will an over investment through the company in current assets. It will probably be excessive & the organization will be in this respect over-capitalized. The return on the investment is going to be below it should be, & long-term funds is going to be unnecessarily tide up when they may be invested elsewhere to generate income.

Over capitalization regarding working capital should never exist if you have good management but the warning since excessive working capital is poor accounting ratios. The ratios which could aid in judging if the investment linrmw working capital is reasonable include the following.

Sales /working capital. The amount of sales as a multiple of the working capital investment should indicate weather, in comparison with previous year or with similar companies, the total worth of working capital is simply too high.

Liquidity ratios. A current ratio in excess of 2:1 or a quick ratio more than 1:1 may indicate over-investment in working capital. Turnover periods. Excessive turnover periods for stocks & debtors, or a short period of credit obtained from supplies, might indicate the level of stocks of debtors is unnecessarily high or perhaps the amount of creditors too low.