Question

1. Describe procedures for assessing and measuring working capital.

Answer 1

Working capital in a company can be assessed through current ratio or it can also be accessed through working capital cycle.

Current ratio is the ratio of current asset to current liabilities and it is always better to have a higher amount of current assets in the company rather than current liability so, current assets will be providing the company with the adequate liquidity and it will include all such current assets like inventory along with cash and cash equivalents and amount receivables in the shorter period of time and it will be assessed in relationship with all such payables in this short period of time so that the company should be having the adequate amount of liquidity in the short run which will be able to to help itself in order to fund the working capital requirement and it will also provide optimum flexibility in operation.

Working capital cycle is another Matrix which can be used for determination of the working capital requirement as it will be focusing upon collection of cash by conversion of the working capital so it will be determining the optimum liquidity in the hands of the company.

Assessment of working capital measurement in advance is very important for a company because there would be adverse economic cycle and company will need to have appropriate liquidity at that point of time in order to sustain and survive for the longer period of time so working capital requirements must be assessed in advance in order to have a core competitiveness and excess flexibility in the hands of company.