Managers mostly spend their time on working capital as being aware of its’ importance. In fact, an adequate importance is not being given to working capital as the required money for permanent assets are being planned carefully in the institution. Managers think that; as the investments finish, production starts, instantly information about goods and services are provided and they expect a rapid growth about high profit rates. However, nowadays competition conditions are densely seen in the whole sectors and they frequently develop different from images.
What Is Working( Business ) Capital?
Working capital is formed with funds which are adherent to the production factors from the beginning of production to the elapsed time with the aim of obtaining sales income and it is being used for satisfying expenses which are going to be made until obtaining business incomes.
Accordingly, working capital is such a conception that states all of the assets which are possible to be turned into cash in a year with required cash and similar assets to be able to perform daily routine activities of the businesses.
Working capital management is assumed equivalent with liquidity management when loss of liquidity control of the businesses is thought even if a high quality production, an active marketing plan and well- managed, long term assets are being talked about.
Specified transformation time shows differences from firm to firm. The period of time can be more than a year for some businesses and this circumstance can be defined as ‘ Business Capital Transformation ‘.
If production, sales and collection; which are known as the main three basic activities of firms, occurs simultaneously in a business, then there will be no need for working (business) capital.
Drawbacks Of The Inadequate Working Capital Amount
Because of the inadequate raw materials, cash needs and auxiliary product stocks, some deductions in production activities can occur. This situation is going to mean that; the business is not able to use its’ capacity efficiently and the continunity for it will be provided with low- capacity usage. Under these circumstances, cost share per unit from fixed expenses is going to increase, correspondingly to this the product is going to cost much. And as we accept that the sale price isn’ t going to change, profit margin of the respective business is going to decrease.
It is going to be impossible orders’ to be satisfied totally or at the right time. This will cause a lower sales revenue and profit.
Possibility for goods selling is going to decrease with raw material and supply intake in sufficient conditions. This respective circumstance can be defined as a profitability decrease, so that danger for mature outstanding obligations is going to be seen.
The firms which are in need of working capital have to work with overstock materials by sectors that are carried on business. In such situations, operational profitability loses its’ meaning and doesn’ t make sense single- handedly. The profitability after financing costs are especially important in terms of cash flow when working capital is the point in question.
The Possible Precautions For Improving Working Capital
Long- term resource procurement
New credits from banks and sellers
Readjustment of the sale prices
Increase of the debt and stock turnover
Sales of the idle assets
Increase of the capital receipts
The result is;
The shorter this process which begins and ends with cash is, the less needed capital amount is going to be.