The credit managment assigment "Working capital "

Working capital and the balance sheet analysis.
As we know that a balance sheet contains funding and operating items. Funding items includes equity and debt. Operating components include working capital and non-current assets. In other words working capital consists of current assets and current liabilities.
Most of the peoples look at a balance sheet to find out a business’s working capital (or "current") position. It tells us what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. When we studying the position of a company we can clearly see if it has the resources needed to expand internally or if it will have to turn to a bank and take on debt.
How to Read a Balance Sheet: Working Capital
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working capital is simply means current assets minus current liabilities. It's the best way to determine how much a business has in liquid assets to build its business, fund for growth, and produce shareholdedr value.
Naw to think about Mr ishfaq if this business has positive working capital, it is in good shape, witch have cash on hand to pay for everything it might need to buy. But negative working capital means that ishfaq busines,s current liabilities exceeds than his current assets, it means that Mr ishfaq has adopted the aggressive working-capital policy.If Mr ishfaq has positive working capital it will always perform well..

Ishfaq general store
Balance sheet
January 3, 2009
Asset
Cash Rs 160000
A/R 67000
N/R 25000
Building 84000
Freezer 25000
Fans 7500
TV 15000


Total assets 383500
Liabilities and owner equity


N/P 74500
A/P 59000
S/P 90000

Total liabilities = 233500
Owner equity = 149500

Total assets and total liabilities = 383500

Current assets = (cash + A/R + freezer)
= (160000+67000+25000)
= (252000)
Current liabilities = (N/P+S/P+A/P)
= (74500+90000+59000)
= (233500)
Net working capital = (current assets __ current liabilities)
= (252000__ 233500)
It means that our current assets are greater (252000) than our current liabilities which are 233500. Thus from this calculation I concluded that efficiency of Mr ishfaq general store is greater. If Mr ishfaq lower the level of investment in current asset, it would lead to an increase in the return of firm on total assets. If the explicit casts of short term financing are less than those of intermediate as well as long term financing , the greater the proportion of short term debt to total debt, the greater the profitability of the firm. If Mr ishfaq has received this liability or debt from a bank or from a friend and S/P is also for short term. There fore the use of short term debt as compared to long term debt is likely to result in higher profit, because debt will be paid off during that period when it is not needed by the relevant authority that provided it to Mr ishfaq.
This profit means that ishfaq would maintain low level of current assets and a high amount of c/ liabilities. And by adopting such a strategy will result in a low level of net working capital. This strategy has two types of risk,
1:-Mr ishfaq business will not meet its cash requirement when they occur
2:-he will not support the proper level of sales
Now Mr ishfaq has adopted three different current asset policies alternatives. To assume the relationship between liquidity and current asset level for these alternatives, it is given below,
1 if we calculate liquidity with conservativeness, we saw that policy A is providing more current assets among other policies. There fore if the level of current assets is greater, the firm will have greater liquidity. In this case ishfaq business is able to meet the orders and requirements of his consumers.
Jin policy C is the least liquid which is also known as aggressive policy. In this he has kept the level of cash and other current assets low (50000). So in this situation he has low level of current assets, so he ill not be able to meet the requirement and orders of his customers, as greater risk is involved in this policy.
It can be better and easily understand by the following models,

Liquidity high low
A ______________________________C

Periodicity C _______________________________A

Risk C _______________________________A
It can also be explained by the formula,
Rio = ( net profit/income/total assets)


1:- Rio = (383500/383500) = 1

2:- Rio = (383500/256000) = 1.5

3:- Rio = (383500/206500) = 1.9

In policy A the level of current assets is high 227000, so ishfaq has the ability to meet the consumers demand and other cash obligations.
In policy C due to low level of current assets, the ishfaq business is not able to the financial obligations as they come due. There fore more aggressive working capital policies lead to increase risk. There fore policy C is the more risk working capital policy. We can also say that this policy emphasizes profitability over liquidity. In policy C risk is greater because ishfaq is in search of high profit, there fore he expect to take greater risk. There fore we can say that profitability moves together with risk. If one want to receive greater profit, then he will must face risk, because there is no profit with out any risk, because profit and risk moves hand in hand.
In policy ‘’A’’ we saw that profitability and risk has inverse relationship, when ishfaq has greater level of current assets so in this case he has low expectation of profit, because increased liquidity generally comes at the expense of reduced profitability.
Recommendation:-
I reached to the conclusion that this business of Mr ishfaq has earned a good reputation in the; fast 2 years. There fore it has greater opportunity to make some further investments in this business. This business of Mr ishfaq is also in a position that a bank can trust on it, to grant them loan because it has the ability to expand. And all the loans not only of bank but also of others are safe due to the best planning of the business.