The capital employed in a large business, and the manner in which it is raised, belong towards the area of the principal, or towards the directors. You will find aspects of this subject, however, which intimately concern managers. In large measure it’s they who determine how the capital is employed, and employed towards the greatest benefit. If a business is over-capitalized, that’s, if the issued capital is much more than the business can earn in profits to pay reasonable dividends, the fault doesn’t lie with the management.

The working capital of a limited liability company might fall far brief of its total issued capital, thereby proving a severe handicap to its dividend-earning powers. Insufficiency of working capital is the rock on which many a business comes to grief. That component of a business capital which represents money paid, or shares issued to vendors, or promoters, or used in supplying buildings, plant and equipment may be out of all proportion to what’s left in liquid form as working capital.

The point which will engage the manager attention is this quantity of working capital: the money, that’s, which is available for him to purchase and hold the maximum stocks, to meet working expenses, to provide the credit represented by the book debts, to preserve an sufficient bank balance, to meet all liabilities promptly. In specific he will see to his bank balance, for there are usually emergencies to consider.

There may come adverse times, for example, or there may come sudden opportunities when stocks can be bought in exceptionally favorable circumstances. If heavy interest has to be paid for loans or over-drafts much of the gilt is taken off the gingerbread. Loans and over-drafts have also a poor effect on the credit of a concern.

The manager has, consequently, to exercise supervision of finance. He might have to curtail his activities, remembering how important it’s to purchase on the most favorable terms.

On the other hand, it’s essential to carry ample stocks and to give as extended credit as rival firms. The test of dividends, consequently, is not always the test of good management and remunerative trading.

To most energetic, progressive managers the question of finance is like to be compelled to study too numerous statistical records and details of finance worries the active mind of the manager, who feels his energies are better employed in performing those things which really count within the long run.

Here the benefit of an effective accountant and cashier can save him each time and worry, by providing such periodical statements and returns as he can readily digest. Such statements would show the total purchases and sales and the variation of stocks, expenses totals, financial summaries, together using the bank balance at stated periods.

These periodical statements and statistical returns are fully exemplified within the chapter on organization. It’s only needful, consequently, to say here generally that the particulars therefore supplied should be studied in relation to the larger question of finance. There will likely be some quota of capital reserved for purposes distinct from trading, capital that might be required for buildings, machinery and plant and essential extensions thereof. It’s nicely also to have ample liquid resources for contingencies of various kinds.

If reserve funds, and profits earned, are merged in the business, all locked up in stock, or machinery, financial embarrassment might ensue. It frequently does arise from rapid progress of a business. In such cases the trading is apt to outrun the accessible working capital.

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