Significance of Working Capital Management-Samples for Students

Question: Discuss about the about the significance of working Capital Management in an Organization. Answer: Introduction: This report has been presented to analyze the concept of working capital management in an organization. This report depicts the user about the significance of working capital management in an organization. For conducting this report, a literature review has been done over the finance and working capital of the company to manage the funds and capability of the company as well. For conducting this research, many aspects which are related to working capital management of an organization has been studied and analyzed that what are the factors which could enhance the working capital management of the company and at the same time, what factors are there to diminish the management of working capital of a company. For a practical understanding, process of application of working capital management into a company has been analyzed so that the concept of working capital management could be understood in a better manner. Further, for this report, many other aspects have also been analyzed to make a better research proposal. Literature review has been done over the working capital management to describe the depth knowledge to the user about the working capital management (Bierman and Smidt, 2012). For conducting this research, Panasonic manufacturing Malaysia has been taken into consideration. Working capital management of Panasonic manufacturing Malaysia has been researched and additionally, it has also been analyzed through this study over the company that how this concept could help the company to manage its operations, reduce the cost, manage the short term obligation of the company, maximum utilization of minimum resources etc. Company overview: Panasonic Malaysia is operating its business in the Malaysian market as a subsidiary of Panasonic Asia pacific limited. This company contains its functioning in various businesses such as the wholesale business, import business, electrical business, manufacturing business, telecom business, electrical supplies business and electronics business, insurance products business and home appliances business. Formerly, this company used to recognize as Panasonic Asia pacific (Annual Report, 2016). Afterward, changes have made into the name of the company in 2005 and now, this company is recognized as Panasonic Malaysia. Currently, the head office of the company is in Selangor Darul Ehsan (Annual Report, 2016). Through analyzing over the annual report of the company, it has been founded that the performance of the company is enhancing rapidly from last few years. A depth study has been performed over the financial factors of the company and it has been found that there are various factors which could make an impact over the operations of the company. More, it has also been observed that the strategies adopted by the company from last 2 years are helping the company a lot to manage every financial and working capital aspect (Wood, Wrigley and Coe, 2016). Working capital management: Working capital management describes about the managerial accounting strategy of a company which is designed to utilize and monitor the two aspects of working capital which are current assets and current liabilities, for ensuring the most financially competent operation of the organization. The main purpose of WCM (working capital management) is to make the user sure that the company maintains sufficient flow of cash always to meet its short-term debt obligations and short term operation cost. Conventionally, bankers, investors and creditors have depicted the working capital as a significant element to observe, as significant as the position of the company in terms of finance is portrayed in the final financial statement and the shown profitability in the statement of profit and loss of the company. It is a computation over the efficiency of the company and financial health for short term. Working capital is a part of the capital of the company which is requisite for funding current assets like debtors, inventories and cash marketable securities (Ruddik, 2015). Working capital is the excess amount of current assets over the current liabilities of the company which calculates the extent to that it could investment any growth in revenue from other sources of funding. Funds therefore, invested in short term assets keep rotating and are constantly transferred into cash. This cash flow could be used again in replacement of other current assets. Due to this, the WC is also known as circulating or revolving capital. Formula for Working Capital: "Current Assets Current Liabilities" (Reifschneider et al, 2013) In the Panasonic Malaysia case, working capital management has been evaluated to make sure the competent business functioning of the company. Net working capital refers to a liquidity calculation that intends to find out the capability of the company to make the payments for current assets with current liabilities. It is very important to measure working capital because this is vital information for stakeholders like shareholders, vendors and creditors as it clearly brings out the picture of the companys short term liquidity as well as enhances the optimum utilization of assets. If a company is not able to meet its present commitments with current assets, it will automatically become mandatory to utilize its long-term assets, to make the payments for present obligations. This may result in decreased rate of operations and might in fact be an indicator of very severe financial and organizational problems. The objective of working capital management is to make sure that an entity is ab le to carry on with its operations and that it comprises of enough capacity to satiate both the short term and future expenses that are operational in nature. Working Capital may be improved by increasing the revenue, preferred stock issuing, substituting short term with long term debt, being long term assets for cash and many more. Working capital can be increased with the help of working capital management. Working capital management of the company is quite competent as when the turnover of the company has been enhanced, company has also enhanced its working capital so that the short term debt obligation of the company could be met and at the same time maximum utilization of minimum resources could be done. Working capital 587.0 554.0 503.0 The formula for calculating net working capital for a particular financial year is Current Assets Current Liabilities. Working capital is calculated by subtracting current liabilities from current assets. Current assets consist of components like marketable securities, cash, accounts receivable, inventory and other short-term assets to be used within the year. Current liabilities constitutes of components like the current portion of long-term debt and the accounts payable. The ultimate component of working capital management is inventory or stock management. In to operate with the highest possible efficiency and continue with a higher value of working capital, a firm needs to critically balance sufficient stock on hand to match up with the needs of the customer while ignoring inventory that is not needed to tie up working capital for a longer time period before. Regular checking of the inventory turnover ratio help firms to measure with what rate of efficiency the balance is maintai ned. Calculation of the inventory turnover ratio by dividing the revenue with the cost of the inventory shows how quickly a company's inventory is being replenished after it is sold. A relatively low inventory turnover ratio in comparison to other industries in the same field reveals levels of the inventory are extremely high, while a ratio that is relatively high tells that there is still scope for improvement in terms of ordering of inventory. Working capital is also sometimes known as circulating or short term capital because the funds that are invested in result in cash and thus generates a cash flow which is again used for current assets. The above table depict about the working capital of last 3 year. Through analysis over the annual report of the company, it has been found that the working capital is 587 currently of the company which was 554 in past year. Through this analysis, it has been evaluated that company has increased amount of current assets whereas the current liab ilities of the company has been reduced in 2016. But the growth rate of short term asset is quite lesser than the current liabilities decrement rate (Odell, 2014). It has been evaluated that company has administered the working capital and enhance the amount of working capital to maximum utilization o653f minimum resources. It is obligated for the Panasonic Malaysia to evaluate the market condition and make a batter decision about the working capital of the company accordingly. Currently, this firm has managed the working capital more efficiently by enhancing the amount of current assets and by deducting the amount of current liabilities. This strategy would help the firm to diminish the risk and at the same time, through it, Panasonic would also be able to administer the capital for a short period which would aid the firm to supervise the short term responsibility and companys production (Parrino, Kidwell and Bates, 2011). Additionally, companys business functioning could also get affected because of it. Further, it has also been evaluated for the future opinion that if the firm do not have proficient fund to convene the future view than company is suggested to make few changes into its structure of working capital. Current assets Cash Cash and cash equivalents 602 602 576 Short-term investments 0 5 0 Total cash 603 607 576 Inventories 50 44 48 Other current assets 117 111 64 Total current assets 770 761 688 Current liabilities Taxes payable 1 9 7 Other current liabilities 182 198 178 Total current liabilities 183 207 185 (Annual Report, 2016) Here, it could be suggested to the company to manage the working capital by enhancing the current assets and by making the changes into the current liabilities accordingly. It would help the company to decrease the risk as well as through it; company would be able to manage the capital for short term which would assist the organization to manage the short term obligation and production of the company (Gambacorta and Signoretti, 2014). Further, business functioning of the company also gets affected due to it. Factors: Following are some of the factors which affect the working capital of the company: Nature of business: Normally, the working capital is quite higher in the production companies in comparison of other industries such as service industry. In case of Panasonic, it has been found that this company is a production company thus the required working capital is quite higher (Romney et al, 2006). Volume of sales: Volume of sales also makes an impact over the working capital. Lesser the volume of sales, lesser the working capital is required. It has been analyzed that turnover of the company has been enhanced in 2016 and thus the working capital of the company has also been enhanced (Bandy, 2013). Seasonality: Season also make an impact over the level of working capital. In season time, more working capital is required. In case of Panasonic, the business functioning of the company depends over the season. Thus the working capital is required to be changed by the company all over the year. Length of operating and cash cycle: Further, it has been analyzed that cash cycle and operations length also makes an impact over the working capital of the company. In case of Panasonic, the business functioning and cash cycle of the company does not depend over the season. Thus the similar working capital is required by the company all over the year (Romney et al, 2006). Significance of working capital management: Further, it has been analyzed that following are some of significance to the company due to manage a better working capital for the operations and short term debt obligation of the company: The working capital management efficiency could be calculated through a diversity of ratios and methods. Typically, financial analysts evaluate the cycle of working capital and other ratios of working capital against company`s peers of industry benchmarks. The most usually used ratios and evaluates over the current ratio, sales outstanding days, inventory outstanding days and payables outstanding days (Kurov and Stan, 2016). Higher return on capital: Companies which have a lower working capital, most probably offer a high return to its stakeholders so that the stakeholders would take advantage from a high return for every penny invested in the firm. In case of PANASONIC Malaysia, it has been found that the working capital amount has been enhanced by the company to manage the business functioning of the company. Improved credit profile and solvency: Working capital management offers an idea to maintain the risk profile and long term solvency of the company. Working capital management would permits a business to maintain its short term obligation which contains the salaries, raw material and other operating expenses of the company (Kiran Singh, 2014). In case of Panasonic, it has been found that the working capital amount has been managed by the company in such a term that entire factors of short term obligation could be managed as well as the business functioning could take place smoothly. Higher profitability: Account payable management and account receivable management is important driver of a company to manage the profitability condition of the company. It has been analyzed through this study that company has managed the debtor and creditor both amount to manage the working capital of the company. Higher liquidity: Huge amount of cash and cash equivalents could be tied with working capital thus a company is required to manage the efficiency of working capital to take the benefits of additional liquidity and external financing. Higher liquidity is required especially for the small businesses; it has been analyzed through conducting a study over Panasonic that company is required to manage the higher liquidity (Borio, 2014). Increased business value: Business value is the main concept of an organization. The more the business value of the company, the more the company would be able to achieve the goals and objectives quickly. It has been analyzed through this study that for managing the business value, it is required by a business to manage the short term and long term debt obligation. For managing the short term obligation of the company, it is required to manage the working capital of the company. It has been analyzed through a study that if working capital is managed by the company efficiently and with effectiveness than it becomes easy for them to manage the business value of the company (Airaudo et al, 2015). In case of Panasonic, it has been analyzed that with the better management of the working capital management the business value of Panasonic has been analyzed and this has taken place due to a better management of short term debt obligation by the company (Kaplan and Atkinson, 2015). Favorite financing condition: Favourite financing condition is the concept where an organization plays a significant role and adopts many strategies to achieve the goal of the organization. If an organization get succeed to achieve its financing condition than it becomes easy for the organization to run its functioning. The more the financing condition of the company is favourable, the more the company would be able to achieve the goals and objectives quickly ((Deegan, 2013). It has been analyzed through this study that for managing the financing condition, it is required by a business to manage the short term and long term debt obligation. For managing the short term obligation of the company, it is required to manage the working capital of the company. It has been analyzed through a study that if working capital is managed by the company efficiently and with effectiveness than it becomes easy for them to achieve the favourite financing condition. In case of Panasonic, it has been analyzed that with the better management of the working capital management the favourite financing condition of Panasonic has been analyzed and this has taken place due to a better management of short term debt obligation by the company. Competitive advantages: Competitive advantage condition is the best concept for an organization to manage the non financial factor of the company. Competitive advantages are crucial element of an organization which plays a significant role and also help the organization to achieve the goal of the organization. If an organization get succeed to achieve its competitive advantages than it becomes easy for the organization to run its functioning and grab the more market share in the marketplace (Jaumotte, Lall and Papageorgiou, 2013). The more the financing and non financing condition of the company is favourable, the more the company would be able to achieve the goals and objectives quickly. It has been analyzed through this study that for managing the competitive advantages in terms of financing and non financing condition, it is required by a business to manage the short term and long term debt obligation. For managing the short term obligation of the company, it is required to manage the working capital of the company. It has been analyzed through a study that if working capital is managed by the company efficiently and with effectiveness than it becomes easy for them to achieve the competitive advantage in the market place. In case of Panasonic, it has been analyzed that with the better management of the working capital management helps the company, Panasonic to become more competitive and it has also been analyzed that this has taken place due to a better management of short term debt obligation by the company (Odell, 2014). Uninterrupted production: Uninterrupted financing condition is the concept where an organization plays a significant role and adopts many strategies to manage the production of the company. If an organization get succeed to manage the production and its business condition than it becomes easy for the organization to run its functioning (Parrino, Kidwel and Bates, 2011). The more the production take place without any interruption of the company is favourable, the more the company would be able to achieve the goals and objectives quickly (Grinblatt and Titman, 2016). It has been analyzed through this study that for managing the uninterrupted production, it is required by a business to manage the short term and long term debt obligation. For managing the short term obligation of the company, it is required to manage the working capital of the company (Horngren et al, 2005). It has been analyzed through a study that if working capital is managed by the company efficiently and with effectiveness than it becomes ea sy for them to achieve the favourite financing condition. In case of Panasonic, it has been analyzed that with the better management of the working capital management the uninterrupted production condition of Panasonic has been analyzed and this has taken place due to a better management of short term debt obligation by the company. Application of working capital management: It is crucial for every organization to understand that how the process of working capital management could be applied in the organization to maintain the better management of working capital. Application of working capital management depicts about the various applications and strategies through which the management of working capital could take place and perform a better functions and operations in terms of managing the financing and non financing condition of the company in a better manner (Gambacorta and Signoretti, 2014). Through analyzing the study over the application of working capital management, it has been found that following are the ways through which working capital process could be applied in the organization: Hedging or matching approach: Hedging process is one of the process through which the process of working capital could be applied in an organization. It is a procedure of matching the debt maturities according to the financial needs of the company. According to this approach, the maturity of source of fund which is used by the organization must be according to the assets nature and worth which is to be financed (Wood, Wrigley and Coe 2016). Matching approach is another name of this approach. This strategy suggests the user about the requirement of working capital that the working capital which is required permanently must be financed by the company through long term finance source whereas the working capital which is required on temporary basis could be financed through short term funds of the company (Gitman and Zutter, 2012). Figure: Hedging approach to asset financing (Source: Gitman and Zutter, 2012) The conservative approach: Hedging process is one of the process through which the process of working capital could be applied in an organization. It is a procedure of matching the debt maturities according to the financial needs of the company. According to this approach, the maturity of source of fund which is used by the organization must be according to the long term assets worth which is to be financed (Gal, 2015). Conservative approach suggests the user about the requirement of working capital that the whether the working capital which is required permanently or temporary must be financed by the company through long term finance source and the short term funds of the company must be retained by the management to meet emergency requirement. This approach further depict that the risk must be minimized and liquidity of the organization must be greater. In this approach, the financing cost is quite more as organization is required to pay the interest even in the off season. Figure: Conservative approach to asset financing (Source: Gali, 2015) The Aggressive approach: Aggressive process is one of the process through which the process of working capital could be applied in an organization. It is a procedure of matching the debt maturities according to the financial needs of the company. According to this approach, the maturity of source of fund which is used by the organization must be according to the assets nature and worth which is to be financed (Fulin, 2011). Aggressive approach suggests the user about the requirement of working capital that the working capital which is required permanently or temporary must be financed by the company through short term finance source. This approach further depict that the risk might be maximum but the cost must be minimum and this approach is more profitable as organization is required to pay the interest only in the peak season. Figure: Aggressive approach to asset financing (Source: Fulin, 2011) Thus through the above discussion, it has been found that conservative approach is quite less risky but the profits are also less in this approach whereas the aggressive approach is quite more risky but the profits are also high in this approach at the same time, hedging approach is the combination of these both approaches as in this approach is risk and profitability both are balanced (Brigham and Ehrhardt, 2013). Through conducting a study over Panasonic Malaysia, it has been found that company make the changes in the working capital according to the market condition, in peak season the working capital of the company is high and at the time of off season, the level of working capital is less, further, it has been analyzed that liquidity position of the company is balanced so the company is following the matching approach. Difficulties in managing the working capital: Further, it has been analyzed that following are some of the issues which could be faced by the company in managing the working capital: Identifying the optimal required working capital Choosing the best approach Analyzing over related aspects Management intervention Government intervention (Fernandes et al, 2014) Literature review: Working capital management describes about the managerial accounting strategy of a company which is designed to utilize and monitor the two aspects of working capital which are current assets and current liabilities, for ensuring the most financially competent operation of the organization. The main purpose of WCM (working capital management) is to make the user sure that the company maintains sufficient flow of cash always to meet its short-term debt obligations and short term operation cost (Shapiro, 2005). Fernandes et al, (2014) depicted that there are various factors which make an impact over the working capital management of the company: Length of operating and cash cycle, Seasonality, Volume of sales and Nature of business. further, it has been argued by Brigham and Ehrhardt, (2013) that there are various significances of working capital management which are Higher return on capital, Improved credit profile and solvency, Higher profitability, Higher liquidity, Increased business value, Favourite financing condition, Competitive advantages and Uninterrupted production (Du and Girma, 2009). Further a research from Du and Girma, (2009) has been studied and found that there are various approaches which could help the company to manage the working capital. Hedging, conservative and aggressive approaches help the company to manage the working capital. conservative approach is quite less risky but the profits are also less in this approach whereas the aggressive approach is quite more risky but the profits are also high in this approach at the same time, hedging approach is the combination of these both approaches as in this approach is risk and profitability both are balanced. Conclusion Through conducting this report, it has been analyzed that Panasonic is performing very well in terms of managing the working capital. It has been found through analyzing over the Panasonic, it has been found that entire benefits of a good management over working capital is enjoyed by the company. Further, it has been found that company make the changes in the working capital according to the market condition, in peak season the working capital of the company is high and at the time of off season, the level of working capital is less, further, it has been analyzed that liquidity position of the company is balanced so the company is following the matching approach. Thus it could be concluded that the performance of the company is quite satisfactory in terms of working capital. Panasonic is performing very well in terms of managing the working capital. It has been found through analyzing over the Panasonic, it has been found that entire benefits of a good management over working capital is enjoyed by the company. Post report reflection: This report has been performed by me to analyze the concept of working capital management in an organization. It has been analyzed by me that the significance of working capital management in quite high in Panasonic. For conducting this report, a literature review has been done by me over the finance and working capital of the company to manage the funds and capability of the company as well. For conducting this research, many aspects which are related to working capital management of an organization has been studied and analyzed that what are the factors which could enhance the working capital management of the company and at the same time, what factors are there to diminish the management of working capital of a company. This report was quite impressive for me and many new points and facts have been analyzed by me through this study, this study is quite impressive and after conducting this study, my knowledge about working capital management has been enhanced on a great level. It is also beneficial for me in my future. Working capital is the most important element for managing the short term finance of the company. 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