(^184) Financial Management
products, resorting to multiple shifts, or marginally adding to the plant and machinery
are some of the common known ways to expand or diversify. Either of them
represent an increase in production which calls for a higher quantum of spending
of current assets, e.g. , you buy more raw material when you produce more and
so on. In such situations, it is unwise to strain the internal resources for avoiding
external funding.
- Price level changes in raw material and finished goods: Inflation has got a
direct bearing on the working capital. It depends to a large extent on the companies
ability to readjust its own prices to cover the increase in the cost. In case the
product or service requires government approval or is administered as far as the
price is concerned, inflation may have a very significant bearing on the working
capital needs. Inflation could be either recessive or expensive. During recessive
inflation the companies are unable to sell more products due to lack of demand
which results in the reduction of production. Inventories pile up and fixed expenses
need a drastic reduction. - Operating Efficiency of the company: Operating efficiency of a company plays
a major role in working capital management. An efficient company will have a
shorter manufacturing period, long credit terms available from suppliers and
minimal customers credit outstanding. If this is achieved then the quantum of
working capital required will be naturally reduced.
The Working Capital Cycle
The Working Capital Cycle (or operating cycle) is the length of time between a companyís
paying for material entering into stock and receiving the inflow of cash from sales. The
movements in the cycle are different for different types of companies and are dependent
on the nature of the company.Figure 8: Operating and Cash CyclesAccounts receivable
periodCash
receivedTimeInventory
sold
Inventory
purchased
Inventory
period
Accounts
payable period
Cash paid
for inventory
Operating cycle
Cash cycle