Working Capital Management in Heavy Engineering Firms

Topics: Working capital, Inventory, Balance sheet Pages: 14 (5131 words) Published: August 18, 2011

Working capital management in heavy engineering firms — A case study Dr. D. Mukhopadhyay

An investigation into the effectiveness of working capital management of an organization with particular reference to its short term liquidity and solvency and impact on commercial operations of the organization.


ntroduction : The importance of working capital in any industry needs no special emphasis. Working capital is considered to be life-giving force to an economic entity. Management of working capital is one of the most important functions of corporate management. Every organization, whether profit oriented or not, irrespective of its size and nature of business, needs requisite amount of working capital. Capital to keep an entity working is working capital. The efficient working capital management is the most crucial factor in maintaining survival, liquidity, solvency and profitability of the concerned business organisation. It needs sufficient finance to carry out purchase of raw materials; payment of day-today operational expenses including salaries and wages, repairs and maintenance expenses etc. and funds to meet these expenses are collectively known as working capital. AICWA, Associate professor (Accounting & Finance), EIILM School of Business, Kolkata, (EIILM University).

In simplicity, working capital refers to that portion of total fund, which finances the day-to-day working expenses during the operating cycle. The term "working" here implies continuity of production and distribution of want removing goods and services required by the society. Working capital is necessary to finance current assets which include inventories, debtors, marketable securities, bank, cash, short term loans and advances, payment of advance tax and so on. Fundamentally, there are two concepts of working capital and they are (i) Gross Working Capital and (ii) Net Working Capital. Gross Working Capital refers to financial resource remaining invested in current assets and Net Working Capital represents the gulf between the Gross Working Capital and Current Liabilities or simply it is the difference between Current Assets and Current Liabilities. A business organization should determine the exact requirement of working capital and maintain the same evenly through out the operating cycle. It is worth mentioning that a firm should have neither excess nor

inadequate working capital as both the phenomena of over capitalization and under capitalization of working capital generate adverse effects on the profitability and liquidity of the concerned firm. The effective working capital necessitates careful handling of current assets to ensure short-term liquidity and solvency of the business. To be more specific, neither understocking nor overstocking of raw materials, careful maintenance and trade off between credit receiving period from sundry creditors and credit allowing period to sundry debtors (generally credit period from sundry creditors should be more than credit period allowed to sundry debtors and the gulf between these two periods is technically known as float of comfort), maintenance of requisite cash and bank balance including provision for contingency and planning both the short term and long term investment in appropriate manner without allowing any cash/bank balance to remain idle in the business are strictly required to be practiced by management. Practice of judicious and effective system of working capital management demands

Finance hire of yeomen service and expertise of hard-core finance professionals. Keeping in view the pragmatic importance of working capital management as a gray area of corporate finance function, an attempt has been made to examine working capital management practices and the problems faced by the firms in working capital management process particularly in heavy engineering industries. An engineering firm having two hundred years old legacy of culture and heritage and being located in...

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