The burning problem of most of Assam’s languid industrial units is the unprofessional management of working capital. Ignoring the necessity of adequate working capital at how badly the state economy has been damaged is a matter of concern that has been manifested by the closed and sick units of the state, and this can be seen as Great caution that if the management of these suffering units is not up to the task, it may not be very difficult to predict the extent of the situation.
There are two types of working capital viz. gross working capital and net working capital. While gross working capital is the total of current assets, net working capital is the difference between current assets and current liabilities. In the current context of panacea demand for lame industrial units in Assam, my main concern is net working capital. Gross working capital is basically a financial concept to show the positions of current assets to financial institutions and infrastructure delivery units etc. for different purposes like getting a loan and adding machinery etc. assets according to the balance sheets at different dates according to the requirements of these entities.
Current assets include items such as cash, bank balances, inventories, accounts receivable and notes receivable, etc. and current liabilities include items such as notes payable, accrued liabilities, bank overdrafts (short term), interest due to lenders but not yet paid creditors and miscellaneous, etc. As is easily understood, the excess of current assets over current liabilities implies a positive liquidity position of a company and unless an industrial unit benefits from such a positive difference in favor of current assets, the danger may creep in, and the pursuit of such negative difference may be the main reason for this unit to turn off.
Although normally a 2: 1 ratio favoring circulating assets is considered ideal, in the context of most lame MSMEs in Assam, for me the ratio of 2.5: 1 and even a little more in favor circulating assets because more auspicious for the very simple reason than during the seasons, if the reinvested money is more than that, it will lead to an easy supply of raw materials, but my suggestion is valid provided that the unit has a capacity usable, accommodating and the marketing department able to accept the challenge. In such a situation, I am overconfident that the profitability of the unit will show an upward trend. A favorable working capital position, first of all, requires that the cost of production be such that the product succeeds in generating the required revenue from sales with a very encouraging flow of customers to the product due to its quality and soundness. price. For this, the cost of labor should be reasonably low, the quality should be competitive in the market, the cost of raw materials should be as low as possible without compromising the quality. Shipping and ordering costs must be as low as possible, aiming for the lowest.
In addition, top management must be competent to take certain decisions from time to time aimed at easing liquidity, such as discounts on market products. Unfortunately, the most vital concept for the survival of an industrial unit is far from being properly implemented in the industrial arena of the state – more predominantly among most MSMEs and, therefore, they demand cash. when daily operational expenses cannot be covered effectively due to the unavailability of sufficient funds.
To arrive at overall decisions on working capital management based on a situation, I strongly advocate an acid test ratio analysis which is the total of cash, accounts receivable, and short-term investments divided by the current liabilities, as shown in the balance sheet. For me, in the context of the ailing industrial units in Assam, the acid test ratio should be around 1.5: 1. If the acidity test report is not favorable, then management will need to be much more careful and results-oriented for working capital management with a broader and much more professional view of inventory management to do facing operational expenses very favorably. Therefore, the need for good inventory management comes to the fore.
There are many raw materials which are very affordable both in price and quantity when seasonally available in abundance; for example, potato prices per kilogram from February to April compared to prices in May until new local products are available on the market. Likewise, different varieties of locally grown mangoes suitable for pickle are available in abundance from the third week of April through May. Thus from April to July, if an industrialist provides sufficient liquidity, the cost of raw materials for mango-based industries becomes very cheap. Not only that, two inherent costs namely the cost of ordering and the cost of ownership can also be organized in a suitable manner. In the case of almost all raw materials, seasonal availability should be the main consideration for manufacturers because during the seasons, price and quantity equity is ensured.
However, for an industrial unit in such purchases, challenges such as cold storage expenses, transportation difficulties during monsoon, etc. properly managed, the cost of holding inventory may increase unreasonably. The answers to all these problems lie very much in the management of working capital. This is a time-limited solution only; the vigorously professional attitude of the marketing department can only provide the permanent solution.
The management of such situations emanates from the concept of working capital management and, pathetically, the use of this concept is far from satisfactory in the vast majority of cases of industrial units in Assam. Not to mention any movement to increase investments in fixed assets which are capital expenditures, the initially infused capital expenditures may even become an unbearable excess if the management of working capital is improper and in Assam, an impartial and thorough investigation. will surely conclude that most of the sick industrial units suffer from a mismatch between heavy capital expenditure and poor working capital management. While capital expenditures ensure the availability of infrastructure, working capital must ensure sufficient funds for day-to-day operational activities.
Satyajit Kumar Sharmah Thakur is an attorney at the High Court of Gauhati. He can be contacted at [emailÂ protected]