Working Capital Cycle Summary

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LETERATURE REVIEW Lambrix and Singhvi (1979) adopting the working capital cycle approach to the working capital management, also suggested that investment in working capital could be optimized and cash flows could be improved by reducing the time frame of the physical flow from receipt of raw material to shipment of Finished goods, i.e. inventory management, and by improving the terms on which firm sells goods as well as receipt of cash. However, the further suggested that working capital investment could be optimized also (1) by improving the terms on which firms bought goods i.e. creditors and payment of cash, and (2) by eliminating the administrative delays i.e. the deficiencies of paper-work flow which tended to extend the time-frame…show more content…
It is the investment required for running day-to-day business. It is the result of the time lag between the expenditure for the purchase of raw materials and the collection for the sales of finished products. The components of working capital are inventories, accounts to be paid to suppliers, and payments to be received from customers after sales. Financing is needed for receivables and inventories net of payables. The proportions of these components in the working capital change from time to time during the trade cycle. The working capital requirements decide the liquidity and profitability of a firm and hence affect the financing and investing decisions. Lesser requirement of working capital leads to less need for financing and less cost for capital and hence availability of more cash for shareholders. However the lesser working capital may lead to lost sales and thus may affect the…show more content…
A large number of factors, each having a different importance, influence working capital needs of firms. The importance of factors also changes for a firm over time. Following are the factors which generally influence the working capital requirements of firms. Nature of business: Size of business/ scale of operation: Production policy : Manufacturing process/ length of production cycle: Sales and demand conditions: Credit policy: Availability of credit: Business cycle: Operating efficiency: Price level changes: Earning capacity and dividend policy: Other factors: FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operation etc. it is not possible to rank them because all such factors are of great importance and individual factors changes a firm overtime. However, the important factors generally influencing the working capital requirements are:  Nature of business  Size of business  Production policy  Manufacturing process  Seasonal variations  Credit policy  Business cycle  Price level change  Working capital cycle USES OF WORKING CAPITAL  The typical uses of working capital are as follows:  Adjusted net loss from

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