On Working Capital Cycle Management Wccm

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by Ashok Agarwal

The best entrepreneur is he who generates maximum turnover and profits with the least capital employed. This can be better and prudently answered by the effective and efficient management of working capital cycle management (WCCM). Today we find that many of the enterprises and entrepreneurs are starving of liquid funds and the FIs are hesitant to finance liquidity crunch / paucity. What the entrepreneurs can do best at their level to solve this chronic and severe problem , without which the business will go sick? The one most important measure and drastic, draconian and harsh step by the top management is minimization of costs, losses, expenses and inputs and maximization of revenues, profits, incomes and outputs. We find that there is no check and control on costs and quality enhancement. The logic of game of turnover states that more production will drastically bring down the per unit cost of production (CP). The total costs which comprise of total fixed costs and total variable costs gets spread over more units manufactured. The wastes & rejections (W&R) to be reduced to minimum. No over-stocking to be done for raw materials, semi-finished and finished goods , of course keeping in view the market conditions which are not 100% in the control of entrepreneur. But many areas are to some extent under the control of the promoter where he can economize and gain internal economies and avoid dis-economies. PROFITS ARE GAME OF TURNOVER (GOT).

The working capital cycle must be kept to the minimum . It means from cash to raw materials , from raw materials to semi-finished goods and from semi-finished goods to finished goods, from finished goods to book debts and from book debts to bills receivables and from bills receivables to cash or bank. This cycle to be kept at the minimum period so that the liquid funds rotate faster. If one paisa is rotated at a supersonic speed by ten times then it is equal to ten paisa. We must not be lethargic in our recovery efforts. The sooner we come back to cash commencing from cash the better it is. But it will depend on many things such as nature of market, demand, competition, product, market, industry etc. It will determine stocking levels.Here one thing is very important and that is total quantum and composition of current assets from the viewpoint of working capital management. Quantum and composition are equally important. Quality of current assets is of paramount importance. High level of book debts is not wholly a plus point , but what % of total book debts are good which matters . Total book debts include doubtful and bad debts too. The delayed recovery of book debts means risk of going these doubtful and lesser chances of recovery. Such amounts irrecoverable are leakages from the liquid funds pipeline. QUALITY OF ASSETS NEEDS TO BE CONTINUOUSLY GEARED UP AND MONITORED. Irrecoverable and unrealizable assets are dummy ones not generating any output. The same way stocks may consist of old, non-moving and obsolete items not contributing anything. QUALITY OF ASSETS GENERATE PRODUCTION, TURNOVER, PROFITS , PRODUCTIVITY AND PROFITABILITY. Maintaining adequacy of assets & quality of asserts is like ensuring adequate quantity & quality of blood for necessary oxygen to the enterprise. TO SOME EXTENT LIQUIDITY ENHANCEMENT IS IN OUR HANDS.
WE CAN SAY GOOD BYE TO LIQUIDITY CRUNCH BY PLOUGHING BACK PROFITS AND RETRIEVING BACK DIVERTED FUNDS CAUSING LESS OXYGEN.

Ashok Aggarwal, DELHI
DATED 12.08.2015

1 COMMENT

  1. What makes a perfect working space? Does being a neat freak really make you more productive? Last month Wired editor-in-chief Scott Dadich argued the case for office desks free from coffee stains, scribbled notes and all other traces of human presence. Meanwhile, the Guardian’s Steven Poole advocated the profitable benefits of messiness. So who is right?