Colgate Segmentation Essay

imagination of Working Capital Working corking refers to short- end point funds, need to oppose run expenses. It refers to the funds to finance its day-to-day operations. It is concerned with up-to-date assets and oc up-to-date liabilities. If a firm cant maintain a hunky-dory level of work capital, it may become insolvent or bankrupt. generally there be 2 concepts of running(a) capital, such as 1. megascopic Working Capital (Quantitative Concept) 2. winnings work Capital (Qualitative Concept) Both these concepts of working capital have operational significance.The two concepts are not reciprocally exclusive. The gross concept emphasizing the use and the net concept emphasizes the inauguration. 1. Gross Working Capital The total live assets are termed as the gross working capital. It is also known as quantitative or circulating capital. It refers to firms investment in short term assets such as currency, marketable securities, accounts receivables, prepaid expenses, inventories etc. Significance a. optimal investment in actual assets. - Inadequate working capital leads to insolvency and ebullient will lead to less profitability.Financing of current assets. - If funds swot up it should be invested in short term securities, dont watch it idle. 2. Net Working Capital The excess of current assets over current liabilities represents net working capital. It may be positive or negative. Net working capital indicates the liquid of the business. Significance a. Maintaining Liquidity Position- Current assets care in meeting financial obligations. Generally for every one rupee of current asset there should be one rupee of current liability. b. Extent of long term capital n financing current assets- If there are Rs 100000 current assets and Rs 75000 current liabilities then NWC is Rs 25000, and it suppositious to be financed from long term funds.Efficient management of working capital involves control over the current assets and current liabilitie s, which are the main components of working capital. 1. Components of current assets Currents assets are those, can be converted into cash at bottom a year. It consists of cash, marketable securities, inventories, debtors, prepaid expenses. 2.Components of current Liabilities Current liabilities are those to be paid in a year. It consists of creditors, short-term borrowings, taxes and proposed dividends. To ensure optimum investment in current assets. To ensure adequate flow of funds for current operations. To speed up the flow of funds. Maintain liquidity and profitability. Maximize shareholders riches possible only when there is sufficient return. Discharge day-to-day liabilities. treasure the business from adverse effects in emergencies. Determines the relevant levels of current assets and their high-octane use. To sustain sales activity. Sales dont convert into cash immediately. It needs time to collection of cash.For maximization profits or slander working capital co st and maintain balance between liquidity and profitability, we need to maintain a balance in working capital. It should not be excessive or inadequate. profligate should manage adequate working capital to run its business Excessive working capital subject matter idle funds which earns no profit. Inadequate working capital disturbs performance and weakens the firms profitability.Danger of Excessive Working Capital It results in unnecessary accumulation of inventories, which lead to mishandling like waste, theft and losses. It is indication of bad credit policy and slack collection period. This leads to higher bad debts that centralise profits. It makes managerial inefficiency. Accumulation inventories tend to make notional profits grow. This character reference of speculation makes the firm to follow liberal dividend policy and embarrassing to make love up with in future when the firm is unable to make speculative profits. Danger of Inadequate Working Capital It decli nes growth because its difficult to undertake profitable projects for non-availability of working capital. Difficult to implement operating plans and reach out firms target. Difficult to meet day-to-day commitments. Inefficient employment of fixed assets. The firm unable to avail attractive credit opportunities. Firm loses its reputation.The continuing flow from cash to suppliers to inventory to accounts receivables and back into cash is operating cycle. 1. Operating cycle for manufacturing firm Stock of raw material is held in order to ensure smooth production. Similarly stock of unblemished goods has to be carried out to meet the demand. 2. Operating Cycle of a Non-manufacturing Firm Non-manufacturing firms are wholesalers, retailers, service firms. They will have the direct conversion of cash into finished goods and into cash.