Working Capital Concept

Topics: Inventory, Working capital, Steel Pages: 34 (10069 words) Published: March 9, 2010

Business activity

Business activity is dynamic in character and subject to wide fluxions. The movement from working capital to income and profits and back to working capital is one of the most important characteristics of business administration. This operation is concerned with the deployment of funds with the hope that they will generate returns, rendering an additional amount called profit. If the operations of an enterprise are to run smoothly, proper relation ship between fixed capital and current capital must be maintained. Its main aim is to use business funds in which a manner that earning are maximized. Financial Management provided a framework for selecting a proper course of action and deciding a viable commercial strategy. This objective can be achieved by :- a)Profit maximization

b)Wealth maximization
Funds are needed for short-term as well long term purposed. In short term we say current operation of the business. For a manufacturing unit payment for raw materials and wages and for meeting routine expenses. All the goods. Which are manufactured in a given time, may not be sold in the period. Naturally funds are blocked in inventory. It is also the fact that all goods may not be sold against ready cash. Some of the goods may be sold on credit basis. The capital is closely related to the term funds and has two meaning. It is used to mean current assets minus current liabilities. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly. It may be clear that objective of working capital management is to maintain a satisfactory level of working capital. In other words, the current assets should not be sufficient enough to cover the current liabilities but at the same time it should also ensure the reasonable amount of safety margin. This is possible only when the different components of working capital are properly balanced. 1.1.1 Working Capital Concepts

There are two concepts of working capital
(i)Gross concept
(ii)Net concept
Gross working capital concept

The term gross working capital, also refers to as working capital, means the total assets that can be converted into cash within an accounting tear and include short-term securities, cash, bills receivables and stock. Net working capital concept

Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment with in an accounting year. Networking capital can be positive or negative. A negative working capital means a negative liquidity and may prove to be harmful for the company. It occurs when current liabilities are in excess of current assets. It may be due to mismanagement of current assets.

In summary it may be emphasized that gross and net concepts of working capital are two facets of working capital management. The data and problems of each firm is different, so it should be analyzed to determine the amount of working capital and timely action should be taken by management to improve the liquidity position of the firm. 1.2 COMPANY PROFILE

The global steel industry has been going through major shifts in focus. Not only has a new steel making giant emerged the entire geographical focus of steel production has been undergoing major changes. Such changes have been taking place on a critical scale since the Second World War but have completely taken many by surprise in the last quarter of a century. Steel is a strong material. The strength of steel reflects the strength of nation. It is reflected in two ways, economic and military. The quantum of steel consumed has been the barometer for measuring development & economic progress. Whether it is construction or industrial goods, steel is the basic raw material. Attention has now shifted to the developing regions. In the West, steel referred to as a sunset...
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