Evaluate the concept of working capital management / give examples ( CLO4). are you serious in the comment, i put a clear question explain the formula and how working capital mangagemet and give me example this your job to do it to search not to to write no data given

Working Capital is the difference between Current Assets and Current Liabilities. Extending on that, working capital management is the management of a company's Current Assets and Current Liabilities. Current Assets are the assets (or resources) which are held by the business for not more than one operating cycle (usually one year) and Current Liabilities are liabilities (or obligations to thrid parties) which are discharged within one operating cycle (usally one year).

Working Capital Management lays great emphasis on monitoring and employing the best possible Current Assets to effectively manage the Current Liabiities and optimize working capital. This ensures that an entity has enough funds to pay their operating expenses and discharge their short term obligations.

An application of Working Capital Management is to time the credit period offered to customers in line with the credit period offered by the vendors. That is, when an entity purchases supplies on credit, the supplier will a credit period of some days to discharge the payables on account of purchases. Likewise, when an entity sells it's products on credit, it offers a credit period to its cutsomers. So as to manage the working capital there should be harmony between credit period offered by suppliers and credit period offered to customers because a short credit period offered by suppliers against a long credit period offered to customers will lead to liquidity crunch.

Another application of WCM could be evaluating whether recievables should be factored or not. This is a possibility when the collection period is long an entity may choose to factor receivables, that is sell their receivables upfront for some % commission. This will help an entity to ensure liquidity, enable it to honor obligations on time and earn interest by investing surplus funds.

WCM is achieved through ratio analysis, primarily, Working Capital Ratio (or Current Ratio), Inventory Turnover Ratio and the Collection Ratio.

Working Capital Ratio reflects the number of times Current Assets are as against Current Liabilities. The extent of excess Current Assets over Current Liabilities is an indicator of short term liquidity.

Inventory Turnover Ratio reflects the movement of inventory in an operating cycle and effeciency of inventory management. Slow moving inventory is a sign of lower sales and inventory buildup which means higher costs of storage and maintenance of inventory and lower cash collection in terms of sales.

Collection Ratio is an indicator of the average days which an entity needs to convert receivables to cash or to collect money against sales. A longer collection ratio is a sign of poor liquidity and shorter collection ratio is a sign of sound liquidity. However, in case of sound liquidity, steps should be taken for management (investment) of surplus funds.

Example:

Let's say that for A Ltd. the Current Assets include

Cash 5,000

Receivables 25,000

Inventory 30,000

Current Liabilities include

Trade Payables 40,000

Accrued Expenses 10,000

Sales 75,000

Cost of Sales 60,000

Here, the Total Current Assets = 5000 + 25000 + 30000 = 60,000

Total Current Liabilities = 40000 + 10000 = 50,000

Current Ratio = 60,000/50,000 = 1.2

Collection Ratio = 365 * Trade Receivables/Sales = 365*25,000/75,000 = 121.67 days

Inventory Turnover Ratio = Sales/Inventory = 60,000/30,000 = 2 times

Now, the Current Assets>Current Liabilities, so the Current Ratio is > 1 however, if you look at the composition of Current Assets, 50% of the current assets are comprised of inventory. The most liquid assets (Cash & Receivables) are only 50% of the Current Assets. Also, the inventory turnover ratio is only 2 times which reflects inventory buildup and slower sales. Further the collection period is 121.67 days, approximatelt 4 months. All of this put together reflect poor working capital management. The collection period needs to be shortened to ensure higher cash flows and inventory buildup needs to be reduced to lower the Trade Payables.