Working capital management under high inflation
Sunday, 10 February 2008
Ahmed Showkat Masud
IN a time of high inflation both trading and manufacturing will need more working capital to maintain their existing level of activity. But it is desirable to check the increasing demand for more working capital as the government opts for a tight fiscal policy to cut down inflation.
To keep the working capital requirement unchanged a company has to take some measures on all segments of its operating cycle. An over-trading situation will be created if a firm tries to invest, beyond its capacity, in stocks and on debts. Overtrading causes acute shortage of cash, as under it the day-to-day outflows exceed collections. To check overtrading, disposal of slow moving and obsolete stocks is a must. Increasing requirement of working capital will be reduced, at least to some extent, if the span of operating cycle can be reduced. Cutting down the time span of operating cycle would make greater turnover at shorter intervals possible. This will help quicker debt settlements.
Getting adequate credit facility from suppliers depends on a firm's credibility with its suppliers. Timely payments to creditors help a firm build good relationship and increase its bargaining power. Cash inflows and outflows have to match to avoid liquidity crisis.
To achieve these targets following areas will have to be given priority: reducing set-up times, purchasing or manufacturing only what is needed now for timely delivery to the customers and ensuring a synchronised and balanced distribution of uneven work loads among workers and machinery.
In mixed-model manufacturing lines, where different products are produced, synchronisation of work loads has to match the set-up times. The manufacturing system would need a flexible capacity to respond quickly to increases in demand. Making the production process flexible, without automation, can be possible by removing unnecessary equipment and activities. It would make production more flexible without investment of additional fund for automation. Timely transportation and material handling would provide lead time. Proper monitoring of these areas by entrepreneurs would ensure stocks maintenance and timely shipment.
Economies of scale enable a producer to offer his product at competitive prices, needed to capture a larger market share. In time of high inflation, economies of scale in the production process would be more helpful for the domestic economy.
All these measures can help maintain working capital at the desired level during high inflation given increased productivity of workforce using the existing equipment. Before going into any incentive scheme, the cost involved must be calculated weighing the benefit to be derived. Increased productivity adds value and reduces labour cost per unit. This would act as a cost cutting measure to offset higher prices of other inputs in a period of high inflation. It would help maintain working capital at the desired level without injecting additional funds.
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The writer works at ONE Bank Ltd., Khatunganj Branch, Chittagong
IN a time of high inflation both trading and manufacturing will need more working capital to maintain their existing level of activity. But it is desirable to check the increasing demand for more working capital as the government opts for a tight fiscal policy to cut down inflation.
To keep the working capital requirement unchanged a company has to take some measures on all segments of its operating cycle. An over-trading situation will be created if a firm tries to invest, beyond its capacity, in stocks and on debts. Overtrading causes acute shortage of cash, as under it the day-to-day outflows exceed collections. To check overtrading, disposal of slow moving and obsolete stocks is a must. Increasing requirement of working capital will be reduced, at least to some extent, if the span of operating cycle can be reduced. Cutting down the time span of operating cycle would make greater turnover at shorter intervals possible. This will help quicker debt settlements.
Getting adequate credit facility from suppliers depends on a firm's credibility with its suppliers. Timely payments to creditors help a firm build good relationship and increase its bargaining power. Cash inflows and outflows have to match to avoid liquidity crisis.
To achieve these targets following areas will have to be given priority: reducing set-up times, purchasing or manufacturing only what is needed now for timely delivery to the customers and ensuring a synchronised and balanced distribution of uneven work loads among workers and machinery.
In mixed-model manufacturing lines, where different products are produced, synchronisation of work loads has to match the set-up times. The manufacturing system would need a flexible capacity to respond quickly to increases in demand. Making the production process flexible, without automation, can be possible by removing unnecessary equipment and activities. It would make production more flexible without investment of additional fund for automation. Timely transportation and material handling would provide lead time. Proper monitoring of these areas by entrepreneurs would ensure stocks maintenance and timely shipment.
Economies of scale enable a producer to offer his product at competitive prices, needed to capture a larger market share. In time of high inflation, economies of scale in the production process would be more helpful for the domestic economy.
All these measures can help maintain working capital at the desired level during high inflation given increased productivity of workforce using the existing equipment. Before going into any incentive scheme, the cost involved must be calculated weighing the benefit to be derived. Increased productivity adds value and reduces labour cost per unit. This would act as a cost cutting measure to offset higher prices of other inputs in a period of high inflation. It would help maintain working capital at the desired level without injecting additional funds.
............................................................
The writer works at ONE Bank Ltd., Khatunganj Branch, Chittagong