Advantage of debt capital is that it is cheaper. The firm can financially leverage through this means to increase its profitability. This is because the rate of interest to be paid on market/bank borrowing is always cheaper compared to the cost of the obligation to declare dividend to the equity shareholders. Dividend can be declared only out of profits after meeting taxation liabilities, while interest is paid as an item of expenditure. Rate of dividend declared may normally be more than rate of interest on the bank borrowings.

Debt capital though cheaper involves risks of default in repayment thereof in times of business crisis, which can have huge adverse impact on the business. Restricted borrowing for working capital based on current ratio of 1: 1.3 to 1: l.4 is advised as a compromise to secure best of both benefits and avoid both risks. In other words borrowing towards working capital is advisable without jeopardizing the favourable current ratio.

The overall working capital policy by the firm may broadly be conservative, moderate or aggressive.

A policy involves in selecting of an option when there are alternative choices. These may relate to investment in working capital covering components of net working capital (base capital), and safety component. The options can also be exercised as between different levels of holding items of current asset and also between long-term source of finance and short term borrowing.

The safety component is decided depending on how conservative or aggressive is the current asset policy. If the firm follows a very conservative current asset policy it would carry a high level of current assets in relation to sales, giving over-weight to the safety component. This policy tends to reduce risk. However it would result in lower profitability. If the firm follows a moderate current assets policy, it would carry a moderate level of current assets in relation to sales. This is the compromise between the extremes of soft and aggressive policies. If the firm on the other hand follows a very aggressive current asset policy, it would choose to carry on the lowest level of current assets in relation to sales. The aggressive policy exposes the firm to greater risks, but earns higher profitability.

Current assets of the firm are financed by spontaneous current liabilities, (sundry creditors, internal accruals etc.), short term bank financing and long-term sources (equity, debentures etc.). There may not be much scope for exercising option in the case of spontaneous current liabilities, as these are determined by extraneous factors. The firm as a policy measure may actively choose between long-term sources and short-term borrowing. The conservative current asset financing policy relies less on short term bank financing and more on long-term sources like public deposits or debentures or equity capital. An aggressive current assets financing policy on the other hand relies heavily on short-term bank finance and chooses to reduce dependence on long-term sources.

It would be deemed conservative when the firm chooses a conservative current assets policy and a conservative current assets financing policy. Such a policy reduces risk but offers a low return. A moderate working capital policy may be a combination of conservative current assets policy with an aggressive current assets financing policy or vice versa. Such a policy offers to secures a moderate return with a moderate risk. An overall aggressive current asset policy is a combination of aggressive current assets policy and an aggressive current assets financing policy. This policy provides a package of high risk and high return. Depending on the risk disposition of the management, the overall working capital policy is to be selected.

Today manufacturing and trading activities are planned for the global markets. On the one hand the revolutionary advancement in use of computer technology and telecom communication has opened tremendous opportunities. On the other hand the widening of the area of operation has made competition stiff and fierce. The reliance is now on quality, competitive cost and customer satisfaction. Improve quality of products, reduce the cost and attract the customer at the global level is the challenges facing businessmen everywhere.

On the other hand the technological advancement in IT and Telecom has opened new and unique opportunities and thrown new concepts of working capital management like supply chain management, cash management on real time settlement basis etc.

A supply chain is a set of three or more organizations linked directly by one or more of the upstream or downstream flows of products, services, finances, and information from a source to a customer. Supply chain management, then, involves proactively managing the two-way movement and coordination (that is, the flows) of goods, services, information, and funds from raw material through end user. A Company with a "supply chain orientation" is one that recognizes the strategic value of managing operational activities and flows across a supply chain. SCM requires the coordination of a wide range of activities and flows that extend across functional and organizational boundaries. These activities include purchasing and material releasing, inbound and outbound transportation, receiving, materials handling, warehousing and distribution, inventory control and management, demand and supply planning, order processing, production planning and scheduling, shipping, processing, and customer service. Progressive organizations have striven to create a sustainable advantage by implementing a wide array of supply chain strategies and approaches.

Introduction of supply chain management aided by appropriate software would help to introduce the most efficient and cost-effective material management system.

Thanks to the advent of Internet banking, the centralised cash management service provided by banks supported by the Real Time Gross settlement facility recently introduced by RBI will enable commercial firms with establishments at scattered geographical locations to plan their cash management on a real time settlement basis, preventing idle balance lying at one point and dearth cash availability at another. This system also enables improvement in receivable management, on account of quicker clearing and collection provided by Banks.

Controls Needed for the Effective Management of Current Assets
[Management of cash, account receivables, management of levels of Inventory
of raw-materials, finished goods and stores]

We have seen that working capital requirement is dependent on the level of operations and the length of operating cycle. Monitoring duration of operating cycle is an important ingredient of working capital control. Monitoring the behaviour of overall operating cycle and its individual components is done through time-series analysis and cross-section analysis. In time-series analysis the duration of the operating cycle and its individual components is compared over a period of time for the same firm. In cross section analysis the duration of the operating cycle and its individual component is compared with that of other firms in the same industry or group. Bearing a comparable nature.

We have seen earlier that cash acts as the lifeline of the business. It is the source or the result for each transaction relating long-term liabilities or current liabilities; block assets or current assets. It is the ultimate liquid resource and enables daily operations of all sorts being carried out. Cash not only acts as the medium to carry out day-today transactions, it also acts as a future store to protect the firm against uncertainties characterising the cash flows. While being used it gives versatile benefits, but when idle, it is unproductive and has an opportunity cost. It is therefore that surplus funds not needed immediately must be invested in short-dated securities like repos, inter-corporate deposits, or bill discounting.

An efficient cash management needs proper monitoring of collections and payments. It is also necessary that prompt billing of debtors, expeditious collection of cheques, control of payables are monitored continuously.

Such forecasts are done for a duration of 2 to 5 years. The forecast indicates the firm's financing needs as also the surplus that would be available for further investment planning. This is similar to the fund flow statement and prepared oh the basis of adjusted net income method. The cash forecast is compared with actual developments periodically by preparing cash reports. Cash report may be prepared at daily intervals and also at month basis.

Such forecasts may be done in sets based on different assumptions. The normal method of is to prepare a forecast of receipts and payments. This document must show the timing and magnitude of expected cash receipts and payments over the forecast period.

Treasury Management has been defined by the Association of Corporate Treasurers- "as the efficient management of liquidity and financial risk in business. TreasuryManagement is responsible for :

1. Management of cash while obtaining the optimum return from any surplus funds;

2. Management of exchange rate risks in accordance corporate policy;

3. Providing both long and short term funds for business at minimum cost;

4. Maintaining good relationship with banks and other providers of finance including shareholders;

5. Advising on aspects of corporate finance including capital structure, mergers and acquisitions.

The first requirement of Receivables Management is to define a sound credit policy, which promotes the interest of the business. Allowing credit promotes sales, but may result in bad debts and recovery problems. The credit policy should fix standards for credit eligibility, credit period, cash discount and collection efforts. Customers to be classified into various credit categories. The decision to give credit should be based on expected profit arising from credit extension and assessed credit worthiness of the counterparty.

There are two widely used methods for monitoring receivables:

1. Receivables expressed as number of days sales outstanding and calculating average collection period.

2. Ageing Schedule. Receivable entries are listed according to length of the period they are outstanding, to identify overdue receivables and take appropriate action thereon.

Inventories form a significant proportion of total assets. It may be the main item under current assets. If the aggregate turnover (purchases & Use of inventory) is reckoned it will be still larger. The basic questions relating to inventory management are:

1. What should be the size of the order termed as Economic Order Quantity?

2. At what level the next order should be placed (re-order level)

3. What should be the pricing of inventory issued for production?

In most cases a few widely used items of inventory constitute the bulk in value as per 20 - 80 formulae. That is 20% of items may cover 80% of value. The identification of such items is done through a method called ABC analysis.

Decisions with regards to inventories should be taken in coordination by several departments in addition to Finance like Production, Purchase and Marketing. It is the function of the financial manager to emphasise the financial point of view and initiate programs with the participation and involvement of others.