financial management

Topics: Inventory, Balance sheet, Generally Accepted Accounting Principles Pages: 1 (319 words) Published: October 13, 2014
working capital is the floating capital and contributes to turnover of a company. as against this, the fixed capital is the amount that an organization spends on plant, machinery etc, which are retained for production of goods or services. These costs are recovered over a period of time. Working capital is the amounts blocked in stores and spares of plant, inventory of raw materials, cost of finished goods lying unsold and the amounts due from buyers, to whom normally credit is extended and of course, also the cost of goods in trasit between dispatch and receipt by customer. Working capital is planned based on cash flows expected- that is the recvoery from customers from the date of disptach, the inventories of finsiehd goods held etc and also on inveontories, raw materials etc. Unless all elements that go in to working capital are under control, the business is seriously effected by cash shortages. borrowings for working capital also carry higher interest costs and to that extent increase in working capital directly affects the profitability. Unless the requirements for production are met, goods cannot be produced in required quantity. this is possible provided sales are made and more than sales, the dues from clients are recovered. If sales and production can be matched, the level of inventory and the amount of current assets needed can be kept to a minimum; therefore, lower financing costs will be incurred. Matching sales and production has the advantage of maintaining smaller amounts of current assets than level production, and therefore less financing costs are incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining sales climate and machinery (capital assets) will be idle. Here lies the tradeoff between level and seasonal production: Full utilization of capital assets with skilled workers and more financing of current assets versus unused capacity, training and retraining workers, with lower financing for current...
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