Page 11 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 6. Regular payment of salaries, wages and other day-to-day commitments: A company
which has ample working capital can make regular payment of salaries, wages and other
day-to-day commitments which raises the morale of its employees, increases their
efficiency, reduces wastages and costs and enhances production and profits.
7. Exploitation of favourable market condition: Only concern with adequate working capital
can exploit favourable market conditions such as purchasing its requirements in bulk
when the prices are lower and by holding its inventories for higher prices.

8. Ability to face crisis: Adequate working capital enables a concern to face business crisis in
emergencies such as depression because during such periods, generally, there is much
pressure on working capital.
9. Quick and regular return on investments: Every investor wants a quick and regular return
on his investments. Sufficiency of working capital enables a concern to pay quick and
regular dividends to its investors as there may not be much pressure to plough back
profits. This gains the confidence of its investors and creates a favourable market to raise
additional funds ion the future.
10. High morale: Adequacy of working capital creates an environment of security, confidence,
and high morale and creates overall efficiency in a business.

Caselet Serbian Entrepreneur Revives Family Business

redrag Todorovic’s company produces wheels for all sorts of containers, including
medical containers and garbage containers, in Northern Serbia. Todorovic has
Pworked in the family business since it was founded by his father twenty years ago.
Originally, the company depended heavily upon exporting goods. But sales evaporated
after the war broke out and sanctions were imposed. Businesses, dependant upon domestic
sales, struggled through the early 1990’s and became crippled in 1997 by Milosevic’s tax
police, who took money unfairly from businesses. Todorovic had no choice – he was
forced to shrink his company.
While struggling to maintain his business, Todorovic learned through a friend about a
USAID-funded small business loan program in Serbia and Montenegro implemented by
Opportunity International (OI). Todorovic had never borrowed money before. Through
the program, Todorovic was able to obtain 5000€ in working capital to expand production
and re-establish export links. This way he gained the adequacy in capital management and
was able to face crisis.
Source: www.usaid.gov

Self Assessment

State whether the following statements are true or false:
6. No business can run successfully without an adequate amount of working capital.

7. Working capital enables a concern to avail cash discounts on the purchases and hence it
reduces costs.
8. Working capital ensures regular supply of raw materials and continuous production.

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