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Working Capital Management - Essay Example

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a) The management of fixed and current assets differs in three important ways. First, in managing fixed assets, time is a very important factor; consequently, discounting and compounding technique play a significant role in capital budgeting and minor role in the management of current assets…
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Working Capital Management
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Working Capital Management

Download file to see previous pages... Gross Working Capital: It refers to the firm's investment in current assets. Current assets in year 2006- 2000000 and in 2007- 2470000. It increased significantly instead of dip in cash because of nearly 71% increment in debtors and 58% increment in inventory of finished goods, but cash reserve dipped by 96% and tightens the liquidity position of company by the end of 2007.
Net Working Capital: It refers to the difference between current assets and current liabilities. In year 2006, NWC-1300000 and in year 2007, 1490000. Net working capital has been increased YoY but it's difficult to assume that how much Working capital is required by the company in the existing business as no industry standard or benchmark standard is not provided. Even the trading cycles are not mentioned regarding finished goods, creditors and debtors, therefore assuming the different cycles is difficult and so does the prediction of working capital.
If we checkout the current asset to fixed assets ratio as it helps in determining the optimum level of current assets so that the wealth of shareholders is maximized. As the firm's output and sales increase, the need for current assets increases. Generally, current assets do not increase in direct proportion to output; current assets may increase at a declining rate with output. This relationship is based upon the notion that it takes a greater proportional investment in current assets when only few units of output are produced than it does later on when firm can use its current assets more efficiently.
For year 2006, CA/FA ratio is 0.55
For year 2007, CA/FA ratio is 0.58
Company has nearly same ratio in both the years that means company increases its assets as per the requirement. That can be analyzed by taking ratio of working capital requirement as a percentage of turnovers, which is nearly 27% in 2006 and nearly 23% in 2007. Therefore it can be said requirement of current assets has been increased proportionately.
It's difficult to assume how much is required to run the business as any standards are not given and it's difficult to presume for an industry. But it can be said that Adorama net working capital has been increased even though company might face problem in quick solvency (which includes mainly within a week convertible current assets) but if we see overall situation of working capital needs company is in sound position even it has overdraft problem but sound position of debtors and inventory can sort it out, certainly company might face liquidity problem as company has very less to meet immediate demands but money can be raised by mortgaging debtors to meet immediate requirements.
Overtrading is mainly matching sales and production cycles, it takes place when a business accepts work and tries to complete it, but finds that fulfillment require greater current assets or working capital. Overtrading is a common problem in businesses and it often happens because of some mismanagement or any unprecedented cause. If you see Adorama has net working capital of 1490000 in 2007, which is enough to meet the requirements but in its cash kitty it has only 20000. Therefore, passing a judgment is difficult and highly depends upon the nature of business, position of different cycles( debtors and inventory mainly) but still I would like to say that there is certainly problem of cash crunch or current ...Download file to see next pagesRead More
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