Working Capital Management^181
will have significant bearing on the short run liquidity of the company. The importance
of preserving this short term liquidity need not be emphasised and hence the need to
manage the working capital.
Working parameters of a company influence the composition mix of various components
of working capital. Whether the company is single product or multiple product? Whether
the company does made-to-order work or it keeps stock in inventory? Whether it is a
manufacturing company or a trading company? Whether it extends credit to its customers
or does not? Whether it gets credit from its suppliers or does not? These are some of
the questions that the company has to answer before it can really decide what levels of
working capital that the company needs.
Single product companies normally operate with a lower quantum of working capital
than a multi-product or multi-process companies. Trading operations, which get the
payments in cash everyday, will necessarily have to manage their funds in a different
way than a defence contractor who gets his payment after six months of the completion
of the job. The management of funds will be altogether different for an infrastructure
contractor whose payment terms are divided over a number of years.
Estimating working capital needs
The size of the companyís investment in current assets is determined by its short-term
financial policies. There are three types of policies that the company can use: 1) Flexible
policy, 2) Restrictive policy and 3) A compromise policy that lies between the two.
A company keeping a flexible working capital policy means that the company is
very liberal in its trade terms and has invested a large amount of funds in its
operations. Flexible policy actions include:
l Keeping large cash and securities balances
l Keeping large amounts of inventory
l Granting liberal credit terms
A company keeping a restrictive working capital policy is basically investing the
lowest amount possible in the operations. for Restrictive policy actions include:
l Keeping low cash and securities balances
l Keeping small amounts of inventory
l Allowing few or no credit sales
A company keeping a compromise working capital policy is realistically investing
the money in the operations, neither has very large amount of cash nor runs
always short of it like the restrictive policy does.