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MGT601 - SME Management - Lecture Handout 25

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WORKING CAPITAL

Working capital management or current asset management is one of the most important aspects of overall financial management in an enterprise. It is basically concerned with the management of current assets and current liabilities and inter relationship between them.

Meaning of Working Capital

Working capital is the amount of funds needed by an enterprise to finance its day to day operation. It is the part of capital employed in short-term operation such as raw materials, semi finished products, sundry debtors. Because of its variable nature, the working capital is also referred to as circulating capital. It may be pointed out that the total working capital is composed of two parts.

  1. Regular Capital
  2. Variable Capital

Regular Working capital is required for permanent investment in any business for holing certain minimum quantity of raw material, finished product or cash. Such investment is irreducible minimum and remains permanently sunk into business.

The remaining portion of working capital is variable. The variable portion first gets tied up into raw materials which are then converted into finished goods. On the sale of goods it gets converted into account receivables or cash and circle is then completed. It is depicted in following figure.

Working Capital

Different Senses of “Working Capital”

The term working capital is usually used in two different senses namely.

  1. Gross Working Capital
  2. Net Working Capital

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MGT603 - Strategic Management - Lecture Handout 42

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STRATEGY EVALUATION

Learning objectives

This topic covers various aspects concerning with the strategy evaluation and enables you to understand the process of strategy evaluation.

Four Criteria (Richard Rummelt): He explains four criteria for strategy valuation. These four criteria are as follow

  • Consistency
  • Consonance
  • Feasibility
  • Advantage

Consistency
Strategy should not present inconsistent goals and policies.

  • Conflict and interdepartmental bickering symptomatic of managerial disorder and strategic inconsistency

Consonance
Need for strategies to examine sets of trends

  • Adaptive response to external environment
  • Trends are results of interactions among other trends

Feasibility
Neither overtaxes resources nor creates unsolvable sub problems

  • Organizations must demonstrate the abilities, competencies, skills and talents to carry out a given strategy

Advantage
Creation or maintenance of competitive advantage