The Importance of Capital

In general, capital is a term used to define resources used to make money. Basically, you use capital to make something else. If you are interested in economics, there is a lot to learn about the concept of capital as an input into the production process.

But we are talking about accounting and finance for your small business, so we will lean towards the accounting interpretation of fixed capital. In practical accounting terms, you can think of fixed capital as fixed assets. The fixed capital assets are used to make something which is then sold for revenue. This is how you convert your capital to cash.

If you want to see your capital, pull out your balance sheet and look on the asset side. Do you see machinery, buildings, trucks, or trailers? If your balance sheet does not include that level of detail you may need to ask the accountant for an asset listing. For those of you who are already hands on, you may have created the asset listing yourself.

In addition to your fixed capital, you should have some working capital. The working capital is what you use everyday in operations - think of it as your on hand capital. Remember from our earlier discussions that resources like inventory and raw materials are assets?

If you take your current assets, like cash, raw materials and inventory, then subtract your current liabilities, like accounts payable, you will get your working capital. Hopefully, the amount of working capital you have is enough to get you through a few weeks of tough times. The working capital is what you need to manage everyday because if you do not, it will diminish and you could run out.

Running out of working capital is bad because that means you are off balance. Your assets, including cash, will begin to pale against your liabilities. It is not easy, however, to manage the working capital. It takes hard work and understanding. We will talk a lot more about working capital in lesson two.

Most small businesses begin getting capital when they first start out. You plan to make money and you need to have some capital to use in making money. Some small businesses can take off from the beginning and do not need another infusion of capital.

If your business is growing at a rate that lets you reinvest earnings and keep growing then you might not need to look for more capital. But some business plans require regular infusions of capital, especially in the beginning growth stages, to stay on target.

It is okay to need more capital so long as your growth plans and future profits can support the payback of more capital. Some capital is secured through collateral and is not really at risk until you can not make a payment and the equipment is taken away. This could have disastrous effects on related parts of your production system.

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World Capital Market

Throughout the early modern period, as communications increased in speed and effectiveness, there were attempts to make larger capital markets, with the end goal being the creation of a global capital market where money can be raised internationally, allowing for greater access by all companies to the same pool of capital regardless of where the company is located, and also free of legislative and other restrictions that apply in some parts of the world. Historically, the raising of capital involved transactions conducted between governments and private individuals. These processes were fraught with problems for both sides, and by the late 17th century, in western Europe, there was an attempt to formalize the process.

This saw the creation of the Bank of England in 1691 (incorporated in 1694), and in the early 18th century the origins of other schemes in other countries, some for city corporations, others for governments. However with the Industrial Revolution many capitalists wanted to be able to raise capital to embark on their projects and there was no regular system of raising capital and sharing the risk. As a result with the building of the Bridgewater (or Worsley) Canal, Francis Egerton, the 2nd Duke of Bridgewater, had to take the entire risk for the venture himself, and although he did end up very wealthy, it was a move that nearly sent him bankrupt. Similarly some major capitalist ventures could come to create major crises in the countries where the vast majority of the investors lived. Two of the most extreme examples of these came from France-the attempt by the Mexican government of Benito Juarez to abrogate the debts incurred by previous Mexican governments leading to the French military intervention in the country to install Emperor Maximilian in the 1860s; and another being the Panama Canal Crisis in the 1880s when French investors lost fortunes in speculation in the shares of a company which hoped to build the Panama Canal.

20th Century

By the 20th century, there were numerous banks that were able to lend capital for industrial and other projects. This certainly helped with the needs of the vast majority of borrowers. However there were companies which invested in one country, financed by investment from another. Some of this was to do with the colonial empires, with the capital for the Malayan rubber industry in the 1900s raised in London; but there was also other examples, including the financing of the building of the Argentine railroad system, also financed in London. By the 1900s London had certainly emerged as the main capital market in the world but it was about to be challenged by New York, which started from 1919 to become the dominant center for global capital. With better communications through a regular telephone and telex service, and now with computer systems, it has been possible to link the capital markets around the world and provide, for the customer, wider options and more access to this capital, and for the lenders, a greater ability to spread the risk among capital investors, and also speculators, around the world.

As well as the global capital market which arose in the major financial centers in the world: New York, London and Paris, and later Frankfurt and Tokyo; the oil price rises of the 1970s created a new area of wealth with the availability of what came to be known as "petrodollars." This led to a number of schemes by which people claimed to have access to a more secretive "global market" with "agents" approaching governments. The most infamous was Tirath Khemlani and his dealings with the Australian government in the early 1970s. The Bank of England warned against these schemes, which profited largely through large cancellation fees which would have to be paid if the government in question wished withdraw from these-there has been no evidence of this hidden "global capital market." The need for the global capital market became essential with increasingly larger numbers of companies having cross-listings by which their stock was quoted on a number of stock markets around the world. With the global capital market, it was possible to raise far larger sums of money than had been possible earlier, and this allowed investors and speculators to spread their risks over a wide range of capital investments all over the world.

The End of the Bretton Woods System

One of the developments that arose from this global capital market was a convergence of real interest rates around the world. This coincided with the end of the Bretton Woods system and the floating of many currencies in the 1970s, coupled with the U.S. government's suspension of the convertibility of the dollar into gold. This allowed the rates of exchange between most major currencies in the world to be set by the market, albeit with the government able to influence this through altering the exchange rates to increase or decrease demand for a currency. As a result, if the government of a specific country sought to use macroeconomic instruments such as interest rates, and they were raised, the demand for the currency would create a rise in the value of the currency, after which the real interest rates would be comparable to those in other countries. With open markets, full and audited accounting by governments, and with the free flow of capital into and out of countries, market forces would balance the currency market forming an equilibrium. Economists defined this as the purchasing power parity theory, although similar theories had been around since the Swedish economist Gustav Cassell (1866-1945) suggested that this could become the case as early as 1916.

Speculation

If the global capital market could cope with balancing out the value of the various currencies, it was soon suggested that widespread speculation could affect the prices of the currencies allowing speculators to make (or lose) vast sums of money. This had led to the Bretton Woods system, which was a deliberate attempt by the United Kingdom, United States, and many other governments to constrain the global capital market in terms of the values of currencies, although it did not stop the two devaluations of the 764 Global Capital Market pound sterling to the U.S. dollar in September 1949 and November 1967. The floating era from 1971 saw a large rise in world interest rates, largely through the rise in the price of petroleum. With the doubling of oil prices in 1978-79 after the Iranian Revolution, the effect was that the economies of North America, Western Europe, and other parts of the world went into recession. George Soros and other operators of hedge funds used the global capital market to raise large sums of money and this in turn resulted in the "Battle for Sterling" in 1992 when Soros fought the Bank of England, and later in 1997 with the Asian Economic Crisis. Since the late 1990s there has also been the increasing role of China in global capital markets, helping create a boom that led to estimates made in 2006 that the global capital market would exceed $228 trillion by 2010, although with the current crisis, this figure now seems improbable.

2008 Crisis

Thus the result of the global capital market and the spreading of risks can lead to many countries seemingly unconnected to the area at economic risk becoming affected. In 2007 with the start of serious problems in the U.S. subprime home mortgage market, the effects were felt not just by the individual lenders, and especially by Fannie Mae and Freddie Mac, but by banks and financial institutions around the world that had invested their money in Fannie Mae and Freddie Mac and suddenly found themselves exposed to the collapse of the subprime market. The crisis was triggered to a certain extent by undue offering and securitization of low-quality subprime mortgages and other lows in the United States, which were abetted by a certain extent by deregulation in the 1990s and a laxity in enforcement of regulations that continued. Stunned American legislators initiated a bailout coupled with a stream of new regulations. Another dramatic effect in 2008 was following a crisis in the Icelandic banking system, it was revealed that vast numbers of individuals, companies, town corporations, and public organizations had invested their money in Icelandic banks because of the better returns offered, without realizing that this increased their level of risk. While there was confidence in the global capital market, there were no problems, but as soon as "panic" breaks out, there is a quick flight of capital, leaving those less able to quickly react to take potential or actual losses, and in extreme cases to lose their investments as well.

Francesco Zinzaro. Article Source: http://EzineArticles.com/?expert=Francesco_Zinzaro

The Value of Social Capital For Organisations

What is Social Capital?

Social Capital (SC) is a concept that comes from economics. It can be defined as a combination of the number of relationships some one has, the economic usefulness to them of those relationships and the quality of them: effectively, how well known someone is, in what circles, and with what degree of affection. It is the social capital in an organisation that means that we care about the effect our work will have on the next part of the production chain, rather than slinging substandard work over the functional line saying, 'done my bit, their problem now'.

Why is it Important in Organisations?

It is the SC of an organisation that influences the return gained on the value of the financial and intellectual assets. It is what makes the whole greater than the sum of the parts. It is social capital that releases organisational good citizen behaviour, high level motivation and that 'good feeling' about work. Social capital is the antidote to the ubiquitous silo mentality that permeates most larger organisations, the tribal mentality that can act against the fullest realisation of the potential value of the organisational assets.

An organisation can purposefully invest in this valuable source of capital like any other. And as with any other investment, it is possible to identify the areas of investment likely to create the greatest return, and therefore carefully target investment activity. For instance it is probably not going to boost an organisations' social capital if it invests in helping the canteen staff to get to know the board, as usefully as it would to invest in building social capital within the board (which isn't to say that the first option doesn't have some value, and in some situations might have the greater value).

Why don't Organisations Invest More in Social Capital?

Often leaders can intuitively see the value of SC, however, an inability to quantify this capital, and the return on their investment, prevents them from taking the risk of investing in it. Interestingly intellectual capital, a similarly non-physical form of capital, does show financial returns which can be directly attributed to it on the balance sheet e.g. licensing revenue and royalties. These returns can be used by leaders to justify the initial investment they made in developing intellectual capital. At present no such mechanism exists for capturing and measuring the return on social capital investment.

Measuring the Economic Value of Social Capital

It is tempting to conclude from this that SC can never exist in the financial sense in the way that machines, buildings and patents do; that it is not worth leaders making the additional effort to try and identify its effect on the balance sheet. Recent developments in economics suggests such thinking can be challenged. Social capital not only exists as a factor in economics, but exists to such a real and definable extent that it is now used by banks as collateral for loans, particularly micro-loans.

The Micro-finance story

Billions of dollars have been lent to (and repaid by) tens of millions of people in areas of the world where social capital is the only form of capital available, and not just in the third world: if you're reading this in London, Manchester, Birmingham or Glasgow, to name but a few places, this is probably happening within a few miles of you.

Social capital is the basis of micro-finance, the practice of lending very small amounts of money to the very poor. It has already revolutionised development policy across the world. The problem, identified by Muhammad Yunus in Bangladesh in the 1970s, was that the poor couldn't borrow money from commercial sources not because they couldn't pay it back but that they had no incentive to do so. This was because they had no collateral which could be repossessed if they defaulted. As a consequence no private lenders were prepared to lend them money. Yunus's experience with the Grameen Bank, and that of other micro-finance institutions, is that the poor, properly incentivised, have the highest repayment rates in the world when lent small amounts, almost 97%.

Yunus incentivised individuals by making possible future loans to others in the village conditional on the repayment of the loan by each borrower. In other words, he secured the loan against each villager's social capital. If she defaulted, none of her friends or neighbours would get loans and she (the vast majority of micro-finance customers are women) would be persona non grata in the village. This suggests that for a particular individual her stock of social capital must be worth more to her than the value of the loan or she would not repay it. A Bangladeshi villager making the decision to repay a $20 loan is making a sophisticated calculation about the value of an intangible asset: her social capital. This clear behavioural indicator of choice suggests that a financial value can be put on an individual's social capital.

Can Social Capital can be Measured in Organisations?

The micro-finance experience suggests that SC can be measured. The question is how can organisational leaders find a way of making such calculations for the stock of social capital in their organisations?

There is not a yet a clear answer on this. We can begin to recognise the SC in organisations by reflecting it in our ways of talking about our organisation. For example referring the member of staff who takes time to contact colleagues to check out their needs and expectations, or who takes the time to let others know something has changed so they don't waste their time, as invaluable, doesn't help us recognise the value she adds. On the other hand saying she, and her actions, are valuable, starts to lead us to ask the right questions about 'How valuable?', and 'How can we measure that?' and 'How much value does that behaviour add?'

How can We Build Social Capital in Organisations?

We may not yet know how to measure SC in organisations with any financial precision, but we do know how to invest in it and build it.

Organisational development activities developed over the last few years, based on an understanding of the organisation as a living human system, act to increase social capital.

Article prepared with help from Jem Smith.B.Sc

Sarah Lewis is a chartered occupational psychologist and managing director of Appreciatingchange (which is a trading name for Jemstone Consultancy). Sarah and her team work with managers and leaders in organisations to achieve effective organisational change at individual, team and organisational level.

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Paradigms of Working Capital Management

INTRODUCTION

For increasing shareholder's wealth a firm has to analyze the effect of fixed assets and current assets on its return and risk. Working Capital Management is related with the Management of current assets. The Management of current assets is different from fixed assets on the basis of the following points:

1. Current assets are for short period while fixed assets are for more than one Year.

>2. The large holdings of current assets, especially cash, strengthens Liquidity position but also reduces overall profitability, and to maintain an optimum level of liquidity and profitability, risk return trade off is involved holding Current assets.

3. Only Current Assets can be adjusted with sales fluctuating in the short run. Thus, the firm has greater degree of flexibility in managing current Assets. The management of Current Assets helps affirm in building a good market reputation regarding its business and economic condition.

Now first let us discuss the paradigms of Working Capital Management.

CONCEPT OF WORKING CAPITAL:

The concept of Working Capital includes Current Assets and Current Liabilities both. There are two concepts of Working Capital they are Gross and Net Working Capital.

1. Gross Working Capital: Gross Working Capital refers to the firm's investment in Current Assets. Current Assets are the assets, which can be converted into cash within an accounting year or operating cycle. It includes cash, short-term securities, debtors (account receivables or book debts), bills receivables and stock (inventory).

2. Net Working Capital: Net Working Capital refers to the difference between Current Assets and Current Liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. It includes creditors or accounts payables, bills payables and outstanding expenses. Net Working Copulate can be positive or negative. A positive Net Working Capital will arise when Courtney Assets exceed Current Liabilities and vice versa.

Concept of Gross Working Capital

The concept of Gross Working Capital focuses attention on two aspects of Current Assets' management. They are:

a) Way of optimizing investment in Current Assets.

b) Way of financing current assets.

a. Optimizing investment in Current Assets: Investment in Current Assets should be just adequate i.e., neither in excess nor deficit because excess investment increases liquidity but reduces profitability as idle investment earns nothing and inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its obligation. It is taken into consideration that the Working Capital needs of the firm may be fluctuating with changing business activities which may cause excess or shortage of Working Capital frequently and prompt management can control the imbalances.

b. Way of financing Current Assets: This aspect points to the need of arranging funds to finance Country Assets. It says whenever a need for working Capital arises; financing arrangement should be made quickly. The financial manager should have the knowledge of sources of the working Capital funds as wheel as investment avenues where idle funds can be temporarily invested.

Concept of Net Working Capital

This is a qualitative concept. It indicates the liquidity position of and suggests the extent to which working Capital needs may be financed by permanent sources of funds. Current Assets should be optimally more than Courtney Liabilities. It also covers the point of right combination of long term and short-term funds for financing court Assents. For every firm a particular amount of net Working Capital in permanent. Therefore it can be financed with long-term funds.

Thus both concepts, Gross and Net Working Capital, are equally important for the efficient management of Working Capital. There are no specific rules to determine a firm's Gross and Net Working Capital but it depends on the business activity of the firm.

Working capital management is concerned with the problems that arise while managing the current assets the current liabilities and the interrelationship that exits between them. Thus, the WC management refers to all aspects of a administration of both current assets the current liabilities.

Every business concern should not have neither redundant nor cause excess WC nor into should be short of W.C. both condition are harmful and unprofitable for any business. But out of these two the shortage of WC is more dangerous for the well being of the firms.

Impact/Harm of Redundant Or Excessive Working Capital

* Excessive WC means idle funds, which earn no profits for the business, cannot earn proper rate of return on its investment.

* When there is a redundant WC, it may lead to unnecessary purchasing and accumulation of inventories causing more chances if theft, waste and losses.

* Excessive WC implies excessive debtors and defective credit policy, which may cause higher incidences of bad debts.

* It may result into overall inefficiency in the organizations.

* When there is excessive WC relation with banks and other financial institutions may not be maintained.

* The redundant WC gives rise to speculative transaction.

* Due to low rate of return on investments the value of shares may also fall.

* In case of redundant WC there is always a chance of financing long terms assets from short terms funds, which is very harmful in long run for any organization.

Dangers of Short or Inadequate Working CapitalØ A concern, which had adequate WC, cannot pay its short-term liabilities in time. Thus it will lose its reputation and should be not be able to get good credit facilities.

* It cannot by its requirements in bulk and cannot avail of discounts. It stagnates growth.

* It becomes difficult for the firms to exploit favorable market conditions and undertake profitable projects due to non-availability of WC funds.

* The firm cannot pay day-to-day expenses of its operations and its credit inefficiencies, increases cost and reduces the profits of the business.

* It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds thus the firms profitability would deteriorate.

* The rate of return on investments also falls with the shortage of WC.

* Operating inefficiency creeps in and it becomes difficult to implement operating plans and achieve the firms profit targets.

Need for Working CapitalFor earning profit and continue production activity, the firm has to invest enough funds in Current Assets in generating sales. Current Assets are needed because sometimes sales do not convert into cash instantaneously and it includes an operating cycle.

Operating Cycle: Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. Investment in current assets such as inventories and debtors is realized during the firm's operating cycle, which is usually less than a year.

The operating cycle of a manufacturing company involves three phases: -

1. Acquisition of resources such as raw material, labor, power and fuel etc.

2. Manufacture of the product which includes conversion into work-in-progress into finished goods.

3. Sale of the product either for cash or on credit.

These phases affect cash flows because sometimes sale is done on credit and it takes sometimes to realize.

Length or Duration of the Operating Cycle: The length of the operating cycle of a manufacturing firm in the sum of the following:

1.Inventory Conversion period

2. Debtors Conversion periods.

The total of Debtors Conversion Period and Inventory Conversion Period is referred to as Gross Operating Cycle.

1. Inventory Conversions Period: The Inventory Conversion Period is the total time needed for Producing and selling the product. It includes:

a. Raw Material Conversion Period.

b. Work-in-progress Conversion Period.

c. Finished Goods Conversion Period.

2. Debtors Conversion Period: It is the time required to collect the outstanding amount from the customers.

Net Operating Cycle: Generally, a firm may resources (raw materials) on credit and temporarily postpones payment of certain expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance investment in Courtney Assets.

The length of the time in which the firm is able to defer payments on various resource purchases is Payables Deferral period. The deference between Gross Operating Cycle and payables Deferral Period is called Net Operating Cycle. If depreciation is excluded from Net Operating Cycle, the computation repercussion represents Cash Conversion Cycle. It is net time interval between cash outflow.

Operating Cycle also represent the time interval over which additional funds, called Working Capital, should be obtained in order to carry out the firm's operations. The firm has to negotiate Working Capital from sources such as banks. The negotiated sources of Working Capital financing are called non-spontaneous sources. If net Operating Cycle of a firm increases it means further need for negotiated Working Capital.

Calculation of Operating Cycle: The calculation of operating cycle helps to know the exact period of WC turnover i.e. how long it takes to convert cash again into cash? Through this calculation one can ascertain the WC period.

FORMULA: -Raw Material Holding Period = Avg. Stocks of Raw Material

Avg. cost of consumption per day

Work in progress Conversion Period = Avg. work in progress

Avg. cost of Production per day

Finished goods holding period = Avg. stock of finished goods

Avg. cost of goods sold per day

Receivables & Debtors collections Period = Avg. book debts.

Avg. credit sales per day

Credit period allowed by creditors = Avg. creditors

Avg. credit purchase

DURATION OF OPERATING CYCLE

GOC = RM + WIP + FG + D + R

NOC = GOC-C

Where GOV = Gross operating cycle.

NOC = Net operating cycle

RM = Raw material conversion period.

C = Credit period available

WIP = WIP conversion period

FG = FG holding period

D & R = Detors and receivables collection period.

Note:

• 360 working days in a year are taken to calculate per day average.
• Avg. means opening + closing /2
• Depreciation is excluded while calculating cost of production & sales as it is a non-fund expense and does not require working capital.

Permanent and Variable Working Capital

There is always a minimum level of current Assets, which is continuously required by the firm to carry on its business operations. The minimum level of Current Assets is referred to as permanent of fixed Working Capital. It is permanent in the same way as the firm's fixed assets are. The extra Working Capital, needed to support the changing production and sales activities is called fluctuating or variable or temporary Working Capital.

Both Kinds of Working Capital, permanent and temporary, are necessary to facilitate production and sale through the operating Cycle.

Estimating Working Capital Needs: Working Capital needs can be estimated by three different methods, which have been successfully applied in practice. They are follows:

1. Current Assets Holding Period: To estimate Working Capital requirements on the basis of average holding period of Current Assets and relating them to costs based on the company's experience in the previous years. This method is based on the operating cycle concept.

2. Ratio of Sales: To estimate Working Capital requirements as a ratio of sales on assumption that Current Assets change with sales.

3. Ratio of fixed Investment: To estimate Working Capital requirements as a percentage of fixed investment.

The most appropriate method of calculating the Working Capital needs of firm is the concept of operating cycle. There are some limitations with all the three approaches therefore some factors govern the choice of method of Working Capital.

Factors considered are seasonal variations in operations, accuracy sales forecasts, investment cost and variability in sales price would generally be considered. The production cycle and credit and collection policy of the firm would have an impact on Working Capital requirements.

Current Assets Financing

A firm can adopt different financing policies for Current Assets Three types of financing used can be:

1. Long-term financing such as shares, debentures etc.

2. Short-term financing such as public deposits, commercial papers etc.

3. Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of a business such as trade credit (suppliers) and outstanding expenses etc.

The real choice of financing Current Assets is between the long term and short-term sources of finances. The three approaches based on the mix of long and short-term mix are:

1. Matching Approach: When the firm follows matching approach (also known as hedging approach), long term financing will be used to finance Fixed Assets and permanent Current Assets and short-term financing to finance temporary or variable Current Assets. The justification for the exact matching is that, since the purpose of financing is to pay for assets, the source of financing and the assets should be relinquished simultaneously so that financing becomes less expensive and inconvenient. However, exact matching is not possible because of the uncertainty about the expected lives of assets.

2. Conservative Approach: The financing policy of the firm is said to be a conservative when it depends more on long-term funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of temporary Current Assets with long term financing. In the periods when the firm has no need for temporary Current Assets, the idle long-term funds can be invested in the tradable securities to conserve liquidity. Thus, the firm has less risk of shortage of funds.

3. Aggressive Approach: An aggressive approach is said to be followed by the firm when it uses more short term financing than warranted by the matching approach. Under an aggressive approach, the firm finances a part of its permanent current assets with short term financing. Some firms even finance a part of their fixed assets with short term financing which makes the firm more risky.

Managing Current Assets: Management of Current Assets is done in three parts. They are:

1) Management of cash and cash equivalents.

2) Management of inventory.

3) Management of accounts receivable and factoring.

Thus, the basic goal of WC management is to manage the current assets the current liabilities of the firm in such a way that a satisfactory level of WC is maintained, i.e. it is neither inadequate nor excessive WC management policies of a firms have a great effect on its Profitability, Liquidity and Structural health of the organization.

WC management is an integral part of overall corporate management. For proper WC management the financial manager has to perform the following basic functions:-

· Estimating the WC requirement.

· Determining the optimum level of current assets.

· Financing of WC needs.

· Analysis and control of WC.

WC management decision are three dimensional in nature i.e. these decisions are usually related to these there sphere or fields.

· Profitability, risk and liquidity.

· Composition and level of current assets.

· Composition and level of current liabilities.

PRINCIPLES OF WORKING CAPITAL

There are four principle of working capital management. They are being depicted as below :

(i) Principle of Risk Variation: - The goal of WC management is to establish a suitable trade between profitability and risk. Risk here refers to a firm's ability to honor its obligation as and when they become due for payments. Larger investment in current assets will lead to dependence. Short term borrowings increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss On the other hand the reserve situation will increase risk and profitability And reduce liquidity thus there is direct relationship between risk and profitability and inverse relationship between liquidity and risk.

(ii) Principle of Cost Capital: - The various sources of raising WC finance have different cost of capital and the degree of risk involved. Generally higher the cost lower the risk, Lower the risk higher the cost. A sound WC management should always try to achieve the balance between these two.

(iii) Principle of Equity Position: - This principle is considered with planning the total investment in current assets. As per this principle the amount of WC investment in each component should be adequately justified by a firms equity position Every rupee contributed current assets should contribute to the net worth of the firm The level of current assets may be measured with the help of two ratios. They are:

· Current assets as a percentage of total assets.

· Current assets as a percentage of total sales.

(iv) Principle of Maturity Payment: - This principle is concerned with planning the source of finance for WC. As per this principle a firm should make every effort to relate maturities of its flow of internally generated funds in other words it should plan its cash inflow in such a way that it could easily cover its cash out flows or else it will fail to meet its obligation in time.

REFERENCE

1. Anand, M. 2001. "Working Capital performance of corporate India: An empirical survey", Management & Accounting Research, Vol. 4(4), pp. 35-65.
2. Bhalla, V. K., 'Working Capital Management', Anmol, New Delhi, 2005.
3. Bhattacharya, Hrishikes, 'Working Capital Management: Strategies and Techniques', Prentice-Hall of India Products, 2004.
4. Burns, R and Walker, J. 1991. "A Survey of Working Capital Policy Among Small Manufacturing
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6. Padachi, Kesseven, 'Trends in working capital managmenet and its impacts on firms performance: An analysis of Mauritius small manufacturing firm', International Review of Business Research Papers, Vol. 2., October 2006, p-45-58.
7. Sadri, Sorab & Tara, Sharukh, N., 'Understanding Working Capital Management', Rai Business School, Mumbai, March 25, 2006.

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