THE ROLE OF WORKING CAPITAL MANAGEMENT IN PRIVATE SECTOR ESTABLISHMENTS
MEANING OF WORKING CAPITAL MANAGEMENT
There has been no consensus among scholars on the meaning and definition of working capital. Western and Brigham defined it simply as a firm’s investment in short-term assets cash; short-term securities account receivable and inventories.
1) On the other hand, pickles defined it as the excess of current and liquid assets over current liabilities requisites in a business having regard to reasonable provision for contingencies so as to enable it to conduct its operations normally and face from financial embarrassment and to avoid losses consequent upon incurring commitment beyond its capacity in the ordinary course of events.
2) Stanley and Hirf defined working capital as the financing and management of current asset of the firm.
3) Working capital may be defined as those assets held for current use within a business less the amount due to those who await settlement in the short-term for leave supplied in whatever form.
4) For where settlement is awaited by creditors in the short-term even for the supply of fixed asset the debt are instrumental in reducing the total value of current working capital.
Eldin puts it that the concept of investment required in a business enterprise to maintain the day to day operations as opposed to that investment that is committed for a longer period.
5) This has sometimes been called “circulating capital” this investment in working capital is a continual process changed through daily transaction. Brentey and Mayors defined it simply as a short-term or current assets and liabilities.
6) It will see that the conception of evoking capital of Brentey and Mayors differs from that of Weston and Brigham by the omission of current liabilities, which represents short-term assets. They all, however agreed on the excess of current assets on money capital is similar to that of Weston and Brigham’s. He defined it as a company’s investment in short-term assets.
7) He however added another dimension by stating that in practice all capital is working. His supporting argument is that the finance manager is not only concerned with the operation and control of working capital but also with how is financed.
He views working capital as the excess of current assets over current liabilities significant in the identification of sources of its financing.
Lee takes a different view from the above concepts of working capital, which are conventional. He sees working capital in terms of resources available in the short-term and he agrees that in a business contract working capital should be regarded as the sum of the non-cash, cash and current resources as comprising of stocks and work-in-progress as well as debtors minus creditors and other short draft. According to him, overdraft should exclude because it is a revolving liability of non-current nature.
Lucy defined management as the direction to enterprise through the planning organizing, coordinating and controlling of its human and material resources towards the achievement of a predetermined objective. Relating to the issue at hand working capital management can then be said to involve the directing, planning, organizing, coordinating, financing and controlling of resources available to the private and public sector in order to achieve a set out objectives or a definite goal.
INEFFICIENT MANAGEMENT OF WORKING CAPITAL
The following is the description of the inefficient, which generally influence the working capital requirements of the organization.
1) NATURE AND SIZE OF BUSINESS
The working capital requirement of a firm basically influenced by the nature of its business, trading and financial firm have a very less investment in working capital take for instance, retail stores which carry large stocks of goods to satisfy the varied and continuous demand of their customer, inventories will be at the minimum and debtors almost non existent. On the other hand, large firms carry heavy inventories of raw materials and work-in-progress and their debtors are likewise usually quite substantiate. The size of the business also has an important impact on its working capital needs. A firm with more working capital them small firm working capital needs, a firm with large of operation will breed more working capital then small firm.
2) INTERNAL POLICY
These can be grouped into two:
- a) PRODUCTION POLICY
Due to seasonal changes in the demand for the firms products constant production may be maintained by the firms in order to resource working capital problems. As steady production policy will cause inventories to accumulate during the off-season period and the firm will be exposed to greater inventory costs and risks. Thus, the organization may adopt the policy of varying its production schedule in accordance.
- b) CREDIT POLICY
It affects the working capital by influencing the level of book debts. The credit term to be granted to the customer may depend upon the normal of the organization. An organization can shape its credit policy within the constraints of individual practices.
3) OPERATING EFFICIENCY
This means ultimate utilization of resources at minimum costs. The contributing factor to its working capital of its efficiency is controlling the operating costs. Better utilization of resources improves profitability and thus, helps in releasing the pleasure on working capital.
2.2 CENTRAL PHILOSOPHY OF A SUCCESSFUL MANAGEMENT
Central philosophy of a successful management is when business private sectors are yielding enough profits; the business will start to operate normally. Also, in an organization or firms before a promoter or shareholders decide to operate a business in a private sector, their aims are to make profit.
Also, the effective provision of the firm can lead much to ensure the successful business they will consider these factors:
- i) The nature of the products
- ii) The nature of the industry in which the business operate.
iii) The size of the business activity.
The main factors, which determine the working capital need of the business, include:
1) Production and sale cycle
2) Business activity serve and
3) Marketing policy.
PRODUCTION AND SALE CYCLE
The production cycle starts with the receipt of raw materials into the stores and end when the finished products leave the finishing line for the finished good store.
BUSINESS ACTIVITY LEVEL
This is another important factor in calculating the working capital requirement of the business. The level of activity will determine:
- i) The level of law material stock that should be held
- ii) The staff required for the production
iii) The level of finished stock needed to meet the planned sales
- vi) Account receivable
- v) The size of credit, the company will obtain from suppliers.
MARKETING POLICY
Most of the key variable of marketing mix has material effect on the working capital need of the business marketing mix mean a unique blend of product distribution, promotion and pricing. Strategies to produce mutually satisfying exchange with a target market. Distribution is sometimes referred to as place thus giving us the ‘4ps’ of marketing, product, place, promotion and price.
- i) PRODUCT STRATEGIES
The marketing begins with the products offering. It is difficult to devise a distribution system or set a price. The heart of the marketing mix is a firm’s product offerings.
Marketers, see products in a much larger context than you might imagine. A product includes package, authority and serving subsequent sales, brand and company image, and designer name like the St Lawrent and Gucci create additional value to everything from cosmetic to both towels. We buy products not only for what they do, but also for what they mean.
- ii) DISTRIBUTION STRATEGIES (PLACE)
Distribution strategies are concerned with making products available when and where customers want them. Wholesalers and retailers participate in what is called a marketing channel or channel of distribution.
Physical distribution consists of all business activities concerned with storing and transporting products so that they arrive in usable condition at designated places when needed. Physical distribution is also part of distribution strategy.
iii) PROMOTION STRATEGIES
Promotion includes personal selling, advertising; stop sales promotions and public relation. Its role is to help bring about mutually satisfying exchanges with market by informing, educating, persuading and reminding them about the benefits in organization offers or the product it markets.
It is naïve to think that a good product always finds market. Buyers must be made aware the product before they can purchase it. A good promotion strategy can sometimes dramatically increase a firm’s sale; each element of promotion is coordinated and managed with the others to create a promotional mix or blend.
iv) PRICING STRATEGIES
The pricing decision is rather simple if the product is very much like others currently in the market.
In a situation like this, the firm sets selling price close to the price of products in the market. But if the products is either new or has features that differentiate it from others, then services, pricing and decision must be made. For instance, it will be decided whether item should be priced to generate immediate or long-term profit. It would also be decided whether demand or cost factor is utilized in setting price. Pricing is the most flexible component of the 4ps.
Marketers can raise or lower price more frequently than they can on any of the other Ps.
[simple-links category=”3211″]
