Question

12. List some factors that make working capital management especially complicated in a multinational corporation?  

Answer 1

Working capital management

Working capital, in general practice, refers to the excess of current assets over current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e., it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organisation. Working capital management should be considered as an integral part of overall corporate management.

To achieve the objectives of working capital management, the financial manager has to perform the following basic functions:

1. Estimating the working capital requirements.
2. Financing of working capital needs.
3. Analysis and control of working capital.

Factors affecting working capital management

1 .Total costs incurred on material, wages and overheads.

2. The length of time for which raw materials are to remain in stores before they are issued for production.

3. The length of the production cycle or work-in-process, i.e., the time taken for conversion of raw material into finished goods.

4. The length of sales cycle during which finished goods are to be kept waiting for sales.

5. The average period of credit allowed to customers.

6. The amount of cash required to pay day-to-day expenses of the business.

7. The average amount of cash required to make advance payments, if any,

8. The average credit period expected to be allowed by suppliers

9. Time-lag in the payment of wages and other expenses.

10. High level of competition increases the need for more working capital.