debt to capital ratio definition

Working capital management

Success or failure

Working capital management is an essential element of financial management. It can make or break a company.

inadequate working capital may jeopardize a company fairly quickly due to liquidity problems. For Moreover, excessive strain on the work of the companys financial capital.

Accounting Definition

Defined accounting capital assets less current liabilities current job. Also known as net current assets. Current assets are those that are considered liquid and convertible into cash must be achievable within 12 months from the date the financial report. Common examples include cash, inventory, accounts receivable, advances and securities. Current liabilities are those expected to be reimbursed within 12 months. Examples include bank overdrafts, short-term loans, accounts payable and accrued liabilities.

Pronouncements of the operation

Operationally, the capital demonstrates the ability of the company to finance its operations and to meet current obligations when they mature. Measures the ability of firms to pay invoices per day from a liquidity

point of view.

When there is insufficient

If you have more liabilities than assets, the result is called net liability current, the working capital deficit or simply negative working capital.

If all commitments were to be immediately payable, the company have enough money to pay them. This could lead to a problem of continuity, which means that the company may not be able to continue operations if there are enough money to pay its obligations on time.

From a standpoint of financial ratios, a company working capital is also represented by their current relationship. Current ratio is calculated using current assets divided by current liabilities. A current report

less than one means that working capital is negative. For example, if current assets were $ 100 and current liabilities were $ 120, the working capital deficit calculated would ($ 20). The ratio is calculated as 100/120, giving 0.83, which is less than one.

Repair strategies:

To facilitate working capital deficit, commonly adopted the following strategies:

a. The capital increase

A company can issue more shares to existing and new investors to provide new funds. This capital injection will help raise funds. The side effect of this may be to dilute the interest of existing shareholders who do not want to inject greater equity in society.

b. Sale of non current assets

Non-current assets are those that should not be convertible into cash within 12 months from the date the financial report. Generally, fixed assets such as land, buildings and equipment. Included

here are also long-term investments in other companies. A company can sell its noncore assets to raise funds to strengthen its working capital.

The other way to liquefy the balance can make sale and leaseback property. This would result in injection funds in the company.

The completion of the additional capital costs would be prudent to cash flow and working capital improvements.

Having too much is bad

On the other hand, too much working capital is not ideal. This is especially true if the expansion of working capital is due to increased inventories and trade receivables, especially when

increasing faster than income.

Stocks

Excess inventories pose several problems for companies. The first is the risk of obsolescence. This could mean the physical deterioration and technical or commercial obsolescence.

The second problem is that inventories of cash drain. Cash is linked before the products are sold and the money collected from customers.

The third problem is that these measures require storage facilities. Occupying valuable space and can cost a company in terms of costs rent or opportunity cost in terms of consolidated facilities.

If a company has an inventory of old, it would be deleting them free fast cash so they can be reallocated to better use.

Trade debtors

Accounts receivable financing account by the company to its customers. Very often, without interest and collateral. Moreover, the company may need to obtain bank financing to pay the interest.

When you build business credit, can also be an indication of lax credit policies and poor monitoring of outstanding debts. It may be useful to devote additional resources to collect debts faster than letting customers take their time to pay their bills more than the credit limit given.

Returned efficiency

The more efficient a company can manage its inventory and accounts receivable, the best for liquidity. More money would be available for business growth, reduce financing costs and payment of shareholders

dividends.

Conclusion

As we can see, it is prudent financial policy, management discipline and supervision to ensure that surveillance is maintained balance for working capital. But the effort will pay off handsomely for the company

with the will to do so.

About the Author

James Leong is the MD and principal consultant of VisionsOne Consulting Pte Ltd. James can be reached at jamesleong@ visions1.com.sg or www.visions1.com.sg. Catch James in action on YouTube under: jamesleongtraining.