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Working Capital Management

Notes MNCs enjoy greater latitude than the domestic firms in regard to their capability to move
their funds between different subsidiaries, leading to fuller utilization of the resources.

MNCs face a number of problems in managing working capital of their subsidiaries
because they are widely separated geographically and the management is not very well
acquainted with the actual financial state of affairs of the affiliates and working of the local
financial markets. As such, the task of decision making in the case of MNCs’ subsidiaries
is complex.

Finance managers of MNCs face problems in taking financing decision because of different
taxation systems and tax rates.
In sum, through MNCs have some advantages in terms of latitude and options in financing, the
problems of working capital management in MNCs are more complicated than those in domestic
firms mainly because of additional risks in the form of the currency exposure and political risks
as also due to differential tax codes and taxation rates.

14.6 Working Capital Management under Inflation

It is desirable to check the increasing demand for capital, for maintaining the existing level of
activity. Such a control acquires even more significance in times of inflation. In order to control
working capital needs in periods of inflation, the following measures may be applied.

Greater disciplines on all segments of the production front may be attempted as under:
The possibility of using substitute raw materials without affecting quality must be explored
in all seriousness. Research activities in this regard may be undertaken, with financial
assistance provided by the Government and the corporate sector, if any.
Attempts must be made to increase the productivity of the work force by proper
motivational strategies. Before going in for any incentive scheme, the cost involved must
be weighed against the benefit to be derived. Though wages in accounting are considered
a variable cost, they have tended to become partly fixed in nature due to the influence of
various legislative measures adopted by the Central or State Governments in recent times.
Increased productivity results in an increase in value added, and this has the effect of
reducing labour’ cost per unit.

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Caution The managed costs should be properly scrutinized in terms of their costs and benefits.
Such costs include office decorating expenses, advertising, managerial salaries and payments,
etc. Managed costs are more, or less fixed costs and once committed they are difficult to retreat.
In order to minimise the cost impact of such items, the maximum possible use of facilities
already created must be ensured. Further the management should be vigilant in sanctioning any
new expenditure belonging to this cost.
The increasing pressure to augment working capital will, to some extent, be neutralised if the
span of the operating cycle can be reduced. Greater turnover with shorter intervals and quicker
realisation of debtors will go a long way in easing the situation.
Only when there is a pressure on working capital does the management become conscious of the
existence of slow-moving and obsolete stock. The management tends to adopt ad hoc measures,
which are grossly inadequate. Therefore, a clear-cut policy regarding the disposal of slow-
moving and obsolete stocks must be formulated and adhered to. In addition to this, there should
be an efficient management information system reflecting the stock position from various
standpoints.

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