Analysis of Working Capital

The assets of the firm cannot be converted in to cash immediately and because of this reason firm can face difficulties to pay its short term debts and operational expenses. Unable to do so can cause serious consequences, at times and even termination of operations in the worst case scenario. These accounts remain under the direct impact of the managers and are most relevant to the day to day operations for all kind of business firms. The cash from operation is consumed and generated through these accounts. In an ideal condition, cash flows in an iterative manner within these accounts in order to keep the operations running. This Cycle is known as Working Capital Cycle. The simplest Working Capital Cycle starts with the purchase of stock from a supplier on credit followed by the selling of finished goods to the buyers on Credit and Cash. Cash generated from selling is used to pay the dues to the supplier, salaries and other expenses of operations. Faster the cycle completes its loop, more the money generated will be possible through operations and need less money to fund working capital. Inadequate working capital can create problems for the business of any size but small and newly opened businesses are the easy victim of it resulting in crashing the business plan in the early phase of life cycle. Level of the inventory differs from not only industry to industry but also company to company. A firm needs to figure out the optimal level of its stocks and inventory by keeping in view its sales requirements, the product, cost of storing along with the strength of its procurement and supply change. Storing the stock itself has the cost associated with it not only in terms of storing facility like a warehouse but also in the form of theft risk, obsolescence, and breakage. Managing and cutting down avoidable expenses is an important factor for the firms to expand their profit margins.