As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting
1. RATIO ANALYSIS
A ratio is a simple
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It is defined as the relation between current assets and current liabilities. Thus,
Current ratio = Current assets Current liabilities
The two components of this ratio are
Current assets
Current liabilities
Current assets include cash, marketable securities, bill receivable, sundry debtors, inventories and work in progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. Other hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e, current assets double the current liabilities is considered to be satisfactory.
Calculation of current ratio
Table no 4.1. showing the current ratio ( Rupees in crores) year 2011-12 2012-13 2013-14
Current assets 2.37 10.33 33.64
Current liabilities 0.96 5.90 15.26
Current ratio 2.47 1.74
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Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirement. The above graph is indicate that in 2011-12the cash is .039 crores but in 2012-13 it has increase to2.64 Crores & in 2012-13 it is increased to 2.39Crorse. in 2013-14, it is increased up to approx. 5.13% cash balance. So in 2010-11, the company has no problem for meeting its requirement as compare to 2011-12.
DEBTORES:
Table no 4.11 SHOWING THE DEBTOR4S NIN THE ORGANIZATION (Rs. In Crores)
Year 2011-12 2012-13 2013-14
Debtors 1.00 0.54 15.34 Source: computed from annual report
Figure 4.8 showing the debtors in the organization
Interpretation:
Debtors constitute a substantial portion of total assets. In India it constitute one one third of current assets. The above graph is depicting that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit
Suppliers are mostly concerned with a company 's ability to pay on their liabilities. Therefore, the current ratio and the quick ratio are both looked at by suppliers. The current ratio takes a company’s current assets and divides that by the company’s current liabilities. This number is
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
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The current ratio measures the ability of a business to pay back their liabilities. Kroger’s current ratio for both years was under one, which shows that Kroger has more current liabilities than current assets. This could predict that Kroger is not in good financial health at this time. However, some of their competitors have current ratios under one too. The grocery store industry trends to have lower liquidity ratios, because they keep lower levels of current assets. Their ongoing sales help pay upcoming liabilities. Still, business owners and investors would be looking for a current ratio over one at least.
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The following content provided will include information regarding Nikes Inc. cash management strategies, which will include more in depth information from the previous group paper. In addition, working capital recommendations will be provided to senior management base on next year’s in the pro-forma financial statements.
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