• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  6. 6
  7. 7
  8. 8
  9. 9
  10. 10
  11. 11
  12. 12
  13. 13
  14. 14
  15. 15
  16. 16
  17. 17
  18. 18
  19. 19
  20. 20
  21. 21
  22. 22
  23. 23
  24. 24
  25. 25
  26. 26
  27. 27
  28. 28
  29. 29
  30. 30
  31. 31
  32. 32
  33. 33
  34. 34
  35. 35
  36. 36
  37. 37
  38. 38
  39. 39
  40. 40
  41. 41
  42. 42
  43. 43
  44. 44
  45. 45
  46. 46
  47. 47
  48. 48
  49. 49
  50. 50
  51. 51
  52. 52
  53. 53
  54. 54
  55. 55
  56. 56
  57. 57
  58. 58
  59. 59
  60. 60
  61. 61
  62. 62
  63. 63
  64. 64
  65. 65
  66. 66
  67. 67
  68. 68
  69. 69

Working Capital Management

Extracts from this document...


1. Executive Summary Working capital is the capital required for maintenance of day-to-day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for that is attributed to the fact that an ineffective working capital management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets & current liabilities but also in maintaining a satisfactory level of working capital. Holding of current assets in substantial amount strengthens the liquidity position & reduces the riskiness but only at the expense of profitability. Therefore achieving risk-return trade off is significant in holding of current assets. While cash outflows are predictable it runs contrary in case of cash inflows. Sales program of any business concern does not bring back cash immediately. There is a time lag that exists between sale of goods & sales realization. The capital requirement during this time lag is maintained by working capital in the form of current assets. The whole process of this conversion is explained by the operating cycle concept. This study gives in detail the working capital management practices in VIRGO ENGINEERS LTD. Management of each current asset, namely inventory, cash, accounts receivable is studied related to VIRGO ENGINEERS LTD. Similarly management of accounts payable is studied to understand the managing of current liabilities. The study of working capital management has shown that VIRGO ENGINEERS LTD. has a strong working capital position (from 2004-till date) since its inception in 1987. The overall position of VIRGO ENGINEERS LTD. is good & the same is expected by continuum of existing management policies, checking exchange rate risk, competing with domestic and global players in terms of quality & quantity. 2. Purpose of the Study The main aim of any firm is to maximize the wealth of shareholders. ...read more.


depreciation) (months/days) -------------------------------------------------------------------------------------------------- 12 months/365 days 4. Debtors The WC tied up in debtors should be estimated in relation to total cost price (excluding depreciation) symbolically, Budgeted Cost of sales per Average debt Credit sales x unit excluding x collection period (In units) depreciation (months/days) -------------------------------------------------------------------------------------------------- 12 months/365 days 5. Cash and Bank Balances Apart from WC needs for financing inventories and debtors, firms also find it useful to have some minimum cash balances with them. It is difficult to lay down the exact procedure of determining such an amount. This would primarily be based on the motives for holding cash balances of the business firm, attitude of management toward risk, the access to the borrowing sources in times of need and past experience, and so on. 13.7.2 Estimation of Current Liabilities The important current liabilities are trade creditors, wages and overheads, 1. Trade Creditors Budgeted yearly Cost of raw Credit period Production x material x allowed by creditors (In units) per unit (months/days) ------------------------------------------------------------------------------------------------- 12 months/365 days 2. DIRECT WAGES Budgeted yearly Direct labor Avg. time-lag in Production x cost per unit x payment of wages (In units) (Months/days) ------------------------------------------------------------------------------------------------ 12 months/365 days 3. OVERHEADS Budgeted yearly Overhead cost Average time-lag Production x per unit x in payment of overheads (In units) (Months/days) -------------------------------------------------------------------------------------------------- 12 months/365 days So Net Working Capital required = Total Current Assets - Total Current Liabilities. 13.8 Working Capital Financing After determining level of working capital, a firm has to decide how it is to be financed. The need for financing arises mainly because the investment in working capital/current assets, that is, raw material, work in process, finished goods and receivables typically fluctuates during the year. Although long-term funds partly finance current assets the main sources of working capital financing, namely, 1. Trade credit 2. Bank credit 3. Commercial papers 4. Certificate of deposits 5. Factoring 13.9 Ratios to Measure the Efficiency of Working Capital * Current Ratio: Current assets / Current liabilities. ...read more.


A firm needs cash to make payments for acquisitions of resources and services for normal conduct of business. Cash is also held to meet emergency situations. Some firms hold cash to take advantage of speculative changes in prices of input and output. Management of cash involves three things. a. Managing cash flows in and out of a firm b. Managing cash flows within a firm c. Financing deficit or investing surplus cash And thus, controlling cash balance at any point of time. Firms prepare cash budget to plan and control and cash flows. Cash budget can serve its purpose only when firm can manage its collection and payments within the allowed limits. A firm should hold optimum amount of cash at any time and invest the temporary excess amount in short term securities. Trade credit creates book debts accounts receivable. It issued as a marketing tool to expand or maintain the firm's sales. A firm's investment on account receivable depends on volume of credit sales and collection period through credit policy. VEL is a multi product manufacturer unit with varying cycle time for each product with huge capital turnover where the working capital requirement depends on the level of operation and the length of operation cycle. In finance, working capital is synonymous with current assets; monitoring the duration of the operating cycle is an important aspect of current assets management and control. 18. Future Scope 1. The analysis of annual report for the financial year 2008-09 is not done because the reports are yet to be released. So, this can be added as scope for future study after it gets released. 2. Due to lack of financial information related to valve industry and other listed valve manufacturing companies, it is not possible to compare Virgos performance with valve industry as whole and also with the listed valve manufacturing companies, which can be a constructive part of future study. 3. One more part of future study can be to study valve industry as whole and to find out the contribution of VEL in context of India and world. 19. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Contemporary issues in management accounting - Target costing,Life cycle costing andQuality ...

    The potential and current buyers of cars such as Ford Fiesta were chosen as target customers. * The initial product concept was developed based on two key customer requirements -- "fun to drive" and "safe" car. * Detailed product features were developed based on detailed and refined understanding of customer requirements.

  2. ABS-CBN Financial Analysis. ABS-CBN Corporation is a Filipino media conglomerate and the country's largest ...

    9. Compare Debt with Equity in the Balance Sheet. Too much debt? 2011 - Debt to Equity Ratio of 1.32 2010 - Debt to Equity Ratio of .99 Yes, the company uses too much debt though it is within the prescribed limit under its loan covenants. 10. Look at the cash flow from investing and financing activities.

  1. Discuss the main theories of international finance and assess how each of them would ...

    complete at least two exchange transactions and these processes always have some transaction exposures from the foreign exchange rate fluctuation. Fisher Effect Theory Fisher Effect Theory has got this name from the economist name "Irving Fisher (1930)". Fisher hypothesised that the nominal interest rate in each country could be decomposed

  2. Equity gives certain powers and duties to trustees to enable the trust to be ...

    This power is given either by the trust instrument or section 32 of the TA 1925. Under advancement the trustees have wide powers of application, up to 1/2 of the beneficiaries share of the trust may be advanced. The trustees must use their discretion when deciding whether or not to

  1. Management Accounting. A number of factors will influence the outcome of an investment appraisal ...

    Even in the absence of perfect capital market, for example, where lending and borrowing rates differ, the principle of using the post-tax cost of borrowing as the opportunity cost of capital still applies (Hirshleifer). Next, the additional profit (or loss)

  2. The break-even analysis shows that my business has a good balance of fixed costs ...

    Assets 1.05% 0.94% 0.78% 36.10% Total Current Assets 9.76% 32.02% 54.51% 52.40% Long-term Assets 90.24% 67.98% 45.49% 47.60% Total Assets 100.00% 100.00% 100.00% 100.00% Current Liabilities 9.69% 11.14% 10.10% 31.90% Long-term Liabilities 87.72% 59.66% 33.62% 26.80% Total Liabilities 97.40% 70.80% 43.73% 58.70% Net Worth 2.60% 29.20% 56.27% 41.30% Percent of

  1. "Describe and compare the alternative methods that companies can use to raise capital in ...

    Thus greater monitoring and control takes place with public issue of debt such as debentures and bonds then term loans from banks. Also when bonds securities are issued corporations have to incur certain costs, investment banking institutions usually charge a fee in relation to the amounts issued, legal fees, registration and other expenses.

  2. This report will incorporate an analysis of Blackmores LTD including, the level of leverage ...

    with a market cap of $501 million (11/05/2011). The organization currently employs over 500 staff in Australia, New Zealand and Asia. Blackmores principal activities include * Products: BKL has a growing range of products that cater for areas in natural health including: Arthritis; Joint, Bone and Muscle; Brain Health; Children's

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work