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Working capital management is an integral part of financial management as well as overall corporate management.“ We need to know when to look for working capital funds, how to use them and how to measure, plan and control them.”

According to this statement a firm willing to achieve a good management of working capital, the

financial manager has to perform the following basic functions: - Forecasting the need of working capital - Sources of working capital

- Analysis and control of working capital ƒ Forecasting the need of working capital:

“Working capital is the life-blood and controlling nerve center of a business.” It is impossible to run a business successfully without an adequate amount of working capital and it is also not possible to run a business successfully with a shortage of working capital. To avoid both the situations arrangements can be made to procure adequate working capital. But the estimation of working capital is not an easy task and there are many factors to be faced. With an example we can get an idea. Of complexity in forecasting the working capital need.

Methods of forecasting the need of Working Capital: There are two methods for forecasting the need of working capital i.e. conventional Method and operating cycle method. In conventional method greater emphasis is laid down on liquidity of a business and cash inflows and outflows are matched with each other. While operating cycle method is more dynamic as working capital is decided on the basis of length of the operating cycles.

Following aspects are considered while forecasting the need of working capital:

ƒ Level of Activity: Level of activity is an important aspect while estimating working capital needs. This estimation is normally based on past experience, installed and utilized capacity of the factory and likely demand.

ƒ Raw Materials: Raw materials consist a good portion of working capital which can be estimated based on the level of activity. Besides the length of production cycle i.e. time period during which material gets converted into produced goods is also to be considered. And storage expenses are also added with the same.

ƒ Labour and Overheads: Method for the payment of wages i.e. daily payment, weekly payment or monthly payment and of overhead expenses decide on the working capital need of a business.

ƒ Work – in – Progress: The period of process is an important aspect as longer the processing cycle, greater will be the working capital requirement. For this period the cost of raw materials, wages and overheads are to be considered. If wages and overheads accrue evenly during the time the process of manufacture is in progress, then on an overage, the total cost of labor and overheads outstanding will only be for half the time.

ƒ Finished Goods: Time period for which the finished goods remains in godowns before it is converted into sales plays an important roll in deciding the amount of working capital. If the items produced by the firm are seasonal, godown expenses increase as the finished goods are to be kept for the long period.

ƒ Sundry Debtors: Credit period allowed to debtors affects the working capital need. Longer the credit period allowed to debtors, greater will be the working capital requirements. Some analysts, while calculating the time – lag on payments by debtors, estimate the book debts less the profit element in tem while other analysts take debtors at book values inclusive of the profit element.

ƒ Cash and Bank Balances: On the basis of past experience the necessity of cash and bank balances to meet the day-to-day payments can be estimated and the amount is to be added to the working capital requirements.

ƒ Sundry Creditors: Credit period allowed by creditors affects the working capital need. Longer the credit period allowed by creditors, lower will be the working capital needs.

ƒ Creditors for Expenses: Time – tag in payments of wages and overheads also decide the amount of working capital. If there is no time- lag involved in payments of wages and overheads, more working capital will be required and less, if there is a time – tag in payments of wages and overhead.

ƒ Contingencies: Beyond the all planning the contingencies affect the amount of working capital need. There are always an unforeseen expenses and the amount of same is added to working capital needed.

For a manufacturing organization, the following factors have to be taken into consideration while making an estimate of working capital requirements:

Factors to be considered while estimating working capital.

(1) Total cost of material, wages & overheads. (2) The length of raw material cycle.

(3) The length of production cycle. (4) The length of sales turnover period.

(5) The average period of credit allowed to customers.] (6) The amount of cash need to pay day to day transactions.

(7) The average amount of cash need to make advance payments, if any

(8) The average credit period expected to be allowed by suppliers. (9) Time – lag in the payment of wages and other expenses.

From the total amount blacked in current assets estimated on the basis of the first seven items given above, the total of current liabilities i.e. the last two items is deducted to find

In cash of purely trading concerns, points 1 to 3 are omitted and remaining 4 to 9 points are to be taken into consideration. As a margin of safety, some extra amount generally calculated and added in the working capital to facilitate contingencies.