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INTRODUCTION OF THE TOPIC

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INTRODUCTION OF THE TOPIC
Every firm aims at maximizing the wealth of shareholders. Earning a steady amount of profit
requires successful sales activity. The firm has to invest enough funds in current assets for the
success of sales activity.
There are different types of inventories that influence the working capital of a firm.
They are raw materials, work-in-progress, finished goods, flabby etc. Inventories should be
managed between the two extreme peaks. It should be neither high nor less. A well
reconciled scientific approach can help the management to plan and control inventory
effectively and efficiently. According to the report of Prakash Tondon Committee (who
conducted a study on the issue of financing inventory and receivables in the light of scarce
resources of the country), commended that most of the Indian Industries generally finance
their inventories with bank credit. Traditionally, the industrial sector of the economy has been
accounting for more than 55 percent to 60 percent of the total credit granted by the banking
system. Industries get bank credits advance against inventory. Normally, credit is made
available on the basis of the inventory pledge or hypothecation. Out of the total value of the
inventory pledged or hypothecated, a certain percentage is advanced to the borrower.
However, a bank may advance loans against the full value of the inventory, the client have.
On an average the bank retain a margin of 15 percent to 35 percent. According to this report
“flabby” inventory shouldn’t be permitted and the “profit making” inventory might be
positively discouraged. A good management always tries to bring down safety inventory as
much as periodical statistical checks may justify. Excess inventory is considered as luxury
and when consider with normal inventory it get clear that one is stable and the other
fluxuates. Even in the normal stage of inventory there should be an excellent system which
maintains the minimum level of Raw materials, process stock, finished goods and stores and
thus ensures continuity of production.
The term working capital refers to current assets which may be defined as those which are
convertible into cash or equivalents within a period of one year and those which are required
to meet day to day operations. The working capital refers to the management of current assets
and current liabilities. A firm's working capital consist of its investments in current assets
which includes short term assets such as cash and bank balances, inventories, receivables and
marketable securities. So the working capital management refers to the management of the
level of all those individual current assets.

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Mainly there are two concepts regarding the meaning of working capital. As per the
first view, working capital is the total of current assets represented by the long term and short
term liabilities. This view place more emphasis on the quantitative aspect of working capital
rather than its qualitative aspect. It is because of the fact that as all the current assets assist in
the conduct of business operations, it doesn't matter whether they are finance by long term
funds or by current or short term liability.
On the other hand, the other view is given more emphasis on the qualitative aspects
rather than quantitative aspects of working capital. Similarly, the definitions of working
capital should be based on the net concept which means that working capital is the excess of
current assets over current liabilities.
Every business needs funds for its establishment and to carryout its day to day
operations. Long term funds are used to create production facilities through purchase of fixed
assets such as plant and machinery, land and building, furniture etc
The need and importance of working capital in a firm cannot be over emphasized.
Hardly, we can find a business firm, which does not require any amount of working capital.
But it is a fact that the requirement of working capital differs from firm to firm.
The need of working capital arises due to the time gap between production and its
realization of cash from sale proceeds. There is time gap in the operation cycle of purchase of
raw material and its production; production and sales, and sales and realization of cash. Thus
it is necessary to have working capital for the following purposes: -
For the purpose of raw material components and spares.
To pay wages and salaries.
For the purpose of meeting day-to-day expenses and overhead costs such as fuel,
power and office expenses etc.
To meet the selling expenses such as packing, advertising etc.
To provide credit facilities to the customers.
To maintain the inventories of raw material work-in-progress, stores and spares and
finished stock.

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INTRODUCTION OF THE TOPIC Every firm aims at maximizing the wealth of shareholders. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for the success of sales activity. There are different types of inventories that influence the working capital of a firm. They are raw materials, work-in-progress, finished goods, flabby etc. Inventories should be managed between the two extreme peaks. It should be neither high nor less. A well reconciled scientific approach can help the management to plan and control inventory effectively and efficiently. According to the report of Prakash Tondon Committee (who conducted a study on the issue of financing inventory and receivables in the light of scarce resources of the country), commended that most of the Indian Industries generally finance their inventories with bank credit. Traditionally, the industrial sector of the economy has been accounting for more than 55 percent to 60 percent of the total credit granted by the banking system. Industries get bank credits advance against inventory. Normally, credit is made available on the basis of the inventory pledge or hypothecation. Out of the total value of the inventory pledged or hypothecated, a certain percentage is advanced to the borrower. However, a bank may advance loans against the full value of the inventory, the client have. On an average the bank retain a margin of 15 percent to 35 percent. According to this report ...
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