WORKING CAPITAL MANAGEMENT AS A TOOL FOR COST MINIMIZATION AND PROFIT MAXIMIZATION

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER ONE

 INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Capital can be classified into two broad categories based on tenure viz. long term and short term capital.

The long term capital of firms is committed to investment in fixed assets. It includes shareholders. On the other hand, short term capital is applied for investment in current assets such as cash, marketable securities and short- term credits. Current assets are usually acquired very often in varying

quantities depending on the demand structure for the firm’s product. Each time a decision to acquire current assets is taken, finance becomes inevitable.

However, it does not necessarily mean that cash has to be paid each time an order for recurrent production input is placed, rather it implies that just like in the case of fixed assets, every decision on current assets has financial implications. For instance, a firm hasto decide how much of the material used for production of goods and services are to be on credit or on cash and carry basis. it also has to determine what proportion of its sale has to be on credit. Also both the optimum and minimum stock levels for raw materials and work-in-progress (WIP) have to be determined and maintained at a given point in time.

Orjih (2001:85) refers to working capital as a firm’s short –term assets cash, marketable securities, trade debtors and

stock, less current liabilities used to finance the current assets. He stated that working capital management therefore means the planning and controlling of both current asset and current liabilities. It involves the administration of cash receivables, inventories, marketable securities and the current liabilities.

He also discussed the two aspects of working capital: This means that the firm’s inve assets. Current assets are those which can be converted in to cash within an accounting year and they

Include cash, short term securities, and stock. Net working capital- this refers to the difference between current assets and current liabilities. Current liabilities are those of outside is which are expected to mature for payment within an accounting year.Net working capital can be positive or negative. It is positive when current assets exceed current liabilities and negative when current liabilities exceed current assets.

Davidson (1984:401) defined “working less current liability”. Weston &Brigham (1977:142) defined working capital management as “management decision on invested in various current assets and how this investment is to be financed”. It is fundamental and of gr as it enables the organization conduct its activities from free financial embarrassment.

Working capital management also aids the management to avoid the losses consequent upon incurring commitments below or above its capacity in ordinary course of business.

Retrof (1982:249) said that a firm should always maintain a sound working capital position for it to have enough to run its

business activities. Both excessive as well as inadequate working capital position are dangerous from fir

Excessive working capital means idle fund which means no profit for the firm, while inadequate working capital renders the firm unable to avail attractive credit opportunities and drastic reduction in the rate of return on total investment. The firm losses its reputation and capital base could be eroded, there by affecting the organizations credit worthiness.

Just as blood is life wire of any human being, the working capital of any company is the pivot around which its day-to-day operations revolve. it cuts across all departments and functions of an organization to the extent that all the organizational activities would ground to a halt of the working capital were not properly managed.

Therefore, the need for a sound and realistic working capital policy for a manufacturing from like Anambra Motor Manufacturing Company (ANAMMCO) becomes imperative

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