THE CONCEPT OF ZERO WORKING CAPITAL

Posted Date : 08-Jun-2011 , 01:23:57 am | Posted By CASANSAAR print

Listen to this Article

0:00

n today’s world of intense global competition, working capital management is receiving increasing attention form managers striving for peak efficiency the goal of many leading companies today, is zero working capital. Proponent of the zero working capital concept claims that a movement toward this goal not only generates cash but also speeds up production and helps business make more timely deliveries and operate more efficiently. The concept has its own definition of working capital: inventories+ receivables- payables. The rational here is (i) that inventories and receivables are the keys to making sales, but (ii) that inventories can be financed by suppliers through account payables.

Companies use about 20% of working capital for each sale. So, on average, working capital is turned over five times per year. Reducing working capital and thus increasing turnover has two major financial benefits. First every money freed up by reducing inventories or receivables, by increasing payables, results in a one time contribution to cash flow. Second, a movement toward zero working capital permanently raises a company’s earnings.

The most important factor in moving toward zero working capital is increased speed. If the production process is fast enough, companies can produce items as they are ordered rather than having to forecast demand and build up large inventories that are managed by bureaucracies. The best companies delivery requirements. This system is known as demand flow or demand based management. And it builds on the just in time method of inventory control.

Clearly it is not possible for most firm to achieve zero working capital and infinitely efficient production. Still, a focus on minimizing receivables and inventories while maximizing payables will help a firm lower its investment in working capital and achieve financial and production economies.

Category : Finance | Comments : 2 | Hits : 1399

Also Read -

Smart Personal Finance Strategies for 2026

Smart Personal Finance Strategies for 2026 Managing personal finances efficiently has never been more crucial than it is today. With the rapid evolution of financial markets, increasing cost of living, and emerging investment opportunities, adopting a well-structured approach to your finances can make a significant difference in your wealth and financial security. 1. Set Clear Financial Goals The foundation of smart financial management is goal-setting. Begin by identifying bo...

Also Read -

Where to Invest Money in India Now â€“ Booming Market & Money Making

General believe lies among several goes saying Stock Market is very unstable, tempestuous, uncertain, gamble and nobody likes taking risks in terms of hard earned money. But the truth lies in fact It has given Extraordinary returns to discipline Investors who understood the power of compounding at Early age and shown good character in investing even in extra ordinary circumstances and shown patience perseverance and has mastered the Art of Regular Investing. In the words of Warren Buf...

Also Read -

Is Indian Economy Sinking ? Itâ€™s Impact on Common Man & Financial Tips

IS INDIAN ECONOMY SINKING ? ITS IMPACT ON COMMON MAN AND FINANCIAL TIPS As per the World bank Forewarn the global economy is going to shrink by 5.2% this year resulting into a global economic crisis deepest recession catastrophe ever in decades. We cannot deny the fact that Indian economy is under devastating & catastrophic change and is witnessed sinking due reasons below – 1. Contraction in markets, 2. Supply chain crisis, 3. Lack of demand, 4. Credit growth is declining ...

Also Read -

Art of fund raising

“Capital crunch in business” – 10 possible ways of refinancing your business- “ART OF FUND RAISING” Leave a Comment / Uncategorized / By CA Jatin Rat Getting battle ready for post covid 19 world is the real test of time and could rack one brain to extreme unseen possibilities of life as nothing is going to remain same as earlier. Series of changes will be witnessed including the life style changes, changes in standard of living, changes in gove...

Also Read -

Digital Payments in India

After Demonetization period, substantial number of Digital Transactions increases but still in India people hesitate to do transaction in Digital payment mode. Digi Dhan and Lucky Grahak Yojana during Demonetization period motivated to do more and more and transaction in Digital mode. Mode of Digital Payments: - NEFT: - NEFT stands for National Electronic Fund Transfer. One can transfer money by using Name of Beneficiary, IFSC, and Bank Account No. of Beneficiary. Money gets cr...