Introduction
I have decided to write my commentary on the WORKING CAPITAL MANAGEMENT INEFFICIENCIES faced by Bhilwara Sabun Utpadak S.S Ltd.
Bhilwara Sabun, was set up in the year of 1985 as a soap manufacturing unit. The Founder, Mr. D.L Somani , has made some serious efforts towards the expansion of company wherein initially the production was based out in home. Gradually, Mr. D.L Somani acquired industrial land, set up basic production facilities, focused on product marketing, and established a prominent name in market and establishing world class production facilities. Today, Bhilwara Sabun is a reputable name in soap industry, in India and abroad.
After having climbed the ladder of success, Bhilwara Sabun is facing some liquidity crisis which is majorly attributed to inappropriate working capital management. Being a manufacturing unit, Bhilwara Sabun has larger requirements for working capital as compared to any trading firm. And its inability to keep in line with its working capital requirements on daily basis is challenging for Bhilwara Sabun.
Written Commentary
In layman’s term, working capital can be defined as funds required for day-to-day business operations such as cash purchases and payments. It is nothing more than current assets less current liabilities.
Currents assets comprises of items that can easily be converted into cash within one year such as cash, accounts receivables, inventories etc. On the other hand, Current liabilities are short term liabilities that can be paid off within one year such as accounts payables, short term debt, accrued expenses, etc.
Working capital management is about practicing a tight control on cash conversion cycles of any firm. Talking about cash conversion cycle, it is the...
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...n the interview with the founder, Mr. D.L Somani, it was found that the firm is having some major investments in fixed assets such as plant, machinery, land and buildings. In order to ensure required working capital in hand, it may be advisable to sell of obsolete or non-functional plant and machinery or land and building. This will make the firm cash-rich and compete in market with much confidence.
Also it was brought into light by the honorable founder that they face this problem of funds being blocked with trade debtors quite frequently. It brings me to thinking that either the product that they are selling has low demand or is of poor quality or else the price is comparatively higher. Therefore, BSUSS might look into venturing into a new and innovative product, focus on delivering quality goods or reducing prices by implementing restructuring strategies in firm.
Measuring the liquidity through the current ratio, with 2.74 in the year 2009,0.74 above the standard, with the decline in the following year meeting exactly the standard at 2% in the year 2010, and a steep decline in the year 2011-2012 as compared to its standard.Resulting in the decline in firm’s ability to meet its day-to-day operating expenses. The current liabilities from 2009 to 2012 have increased by 27.03 billion whereas the investments in current assets have increased just by 26.09 billion, which causes the decline in the current ratio. To cope up with this problem the company should invest more in current assets and should reduce its current liabilities.
The financial challenges facing the company in the working capital management simulation showed how companies are able to play a balancing act with incoming and outgoing cash flow floats. Companies can juggle cash flows by withholding payments to retain capital or negotiate with companies that withhold payments to receive an incoming cash flow. Either way, keeping as much cash to fund operations with out heavy financial leveraging was the greatest challenge. Another juggling act was to keep management and business partners happy. The decisions made were not always positive for everyone.
Costco Wholesale’s business model is focused on generating high sales volumes and rapid inventory turnover (Thompson, Peteraf, Gamble, Strickland III, & McGraw-Hill, 2013, pp. C–9). Which provides Costco with the opportunity to sell and receive cash for inventory allowing them to make payments to vendors before they are due. Consequentially Costco is able to take advantage of the early payment discounts vendors provide as incentive to complete payments earlier. These two aspects of Costco’s business model has allowed them the flexibility of needing a smaller working capital as they conduct their business.
The working capital of Fairmount Energy as calculated using the current assets, and current liabilities given in the annual report of the year ended March 31st, 2009 is -$6,978,713. Given this information, an auditor can conclude that the company has a very low working capital. On March 31st, 2009, Fairmount Energy has a large amount of liabilities and a small amount of assets, which creates a working capital deficit. In addition, the annual report of the year ended March 31st, 2008 shows that the working capital of Fairmount Energy is -$13,897,716 which is an extremely low working
These findings show that the company is doing very well. The financial statements look good and the company is profitable considering the industry averages. Therefore, it is recommended that investors consider this company for their investment portfolio.
The management of working capital involves managing inventories, accounts receivable and payable, and cash. (Study Finance: Working Capital Management)
Liquidity: A company’s liquidity depends on the amount of liquid assets it possesses, which are cash or assets that can easily be converted into cash. The cash flow statement shows how much money is coming in and going out of the business therefore it shows how liquid a company is and how flexible it is to cope with emergencies. Working capital is a significant part of the cash flow analysis, it consists of the current assets less the current liabilities and can help assess the liquidity of the business for the upcoming accou...
Legitimate administration of working capital parts empowers the organizations to hold abundance free trade streams which can out turn be interest in productive speculations to create benefits for the firm. Cutting of expenses significantly affects the free income held by the firm; this allows the firm to have extra funds to exploit beneficial speculation extends that can yield higher returns. Free income does not just effect on incomes and gainfulness of the firm additionally the administration of the monetary record. In the event that the firm neglects to deal with its net working capital appropriately then free money streams may be lower than the net income of the firm. Late research by Hubbard (1998) demonstrates that there is a noteworthy positive relationship between free money streams and benefit, an expansion in the level of money stream of a firm prompts a comparing increment in benefits of the firm. This is accomplished through contributing. The firm ought to consider settling on key venture choices to make utilization of extra money streams. For instance firms that hold abundance trade may utilize it out purchasing overrated firms as opposed to paying out profits to the shareholders. This is conceivable notwithstanding when the organizations have a low budgetary limit in the wake of making acquisitions since they put resources into non productive speculation ventures (Carolyn, Carroll and Griffith, 2001). Firms can choose to hold free money streams for theoretical reason as they sit tight for a productive venture that can guarantee better returns in future. The firm can likewise choose to put resources into danger ventures that have higher returns; these speculations may later yield better returns which could be beneficial to the firm. Then again if6 inadequately contributed free
Inventory being another reason it is hard for Jackson Company to use in the expenses management (Kinney, Raiborn, and Raiborn, 2010). The challenge arises where investment of the products are needed in the event of carrying them for your customers purchase and counterbalance its cost. The company takes a loan to equalize inventory charges as it also remains updated on customers and the trending needs without injuring its flow of cash. As a third reason Cash flow has become challenging for Jackson Company and it still poses a challenge when working with clients who do not pay for their services offered or having unsold stock that requires clearance(Kinney, Raiborn, and Raiborn, 2010). Jackson Company finds the situation tricky when involving the daily expenditures on rent, utilities, staff and inventory. The loan offers money in utilization of daily operations and assists the company survive during the low profits. By having cash flowing in, you can proceed in providing new customers in running revenue ensuring that the losses are catered
It may require additional working capital (operating expenditure) to solve cash flow challenges; it may require the additional capital for a particular acquisition (capital expenditure) or it may require a one-off borrowing to avert a looming financial crisis .
Efficient working capital management is necessary for achieving both liquidity and profitability of a company. A poor and inefficient working capital management leads to tie up funds in idle assets and reduces the liquidity and profitability of a company. Working capital management efficiency is vital especially for manufacturing firms, where a major part of assets is composed of current assets. For an intensive study of working capital management of Indian steel industry focus of the study is on major and significant players of the industry of public and private sector via Steel Authority of India Ltd., Tata Steel Ltd, JSW Steel Ltd. and Essar Steel Ltd. The objective of this study is to measure working capital managing efficiency of selected Indian steel companies for which different activity ratios are used in appraising the efficiency of selected companies. Cash Conversion Cycle (CCC) is a powerful measure for assessing how well a company is managing its working capital. It is used as a comprehensive measure for working capital management and to analyse profitability and performance of selected companies inter firm comparison is done to their judge performance. The ratios of ROCE, assets turnover and
The financing decisions should be made with a view to achieve that target capital structure set by the management of the company. After existence of a company for few years, the financial manager then has to deal with the existing capital structure. Almost every company needs funds to finance its activities continuously. Each time the funds have to be arranged, the financial manager needs to consider the advantages and disadvantages of various sources of finance and selects the best option keeping in view the target capital structure.
It has high liquidity. Thus, the business has enough cash for daily basis expenses (Codjia, 2014).
The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.