Colgate Segmentation , Targeting and Position
MODULE-2
WORKING CAPITAL MANAGEMENT
Concept of Working Capital Working capital refers to short-term funds, need to meet operating expenses. It refers to the funds; to finance its day-to-day operations. It is concerned with current assets and current liabilities. If a firm can’t maintain a satisfactory level of working capital, it may become insolvent or bankrupt. Broadly there are 2 concepts of working capital, such as: 1. Gross Working Capital (Quantitative Concept) 2. Net working Capital (Qualitative Concept) Both these concepts of working capital have operational significance. The two concepts are not mutually exclusive. The ‘gross concept’ emphasizing the ‘use’ and the ‘net concept’ emphasizes the ‘source’.
1. Gross Working Capital The total current assets are termed as the gross working capital. It is also known as quantitative or circulating capital. It refers to firm’s investment in short term assets such as cash, marketable securities, accounts receivables, prepaid expenses, inventories etc.
Significance
a. Optimum investment in current assets.-: Inadequate working capital leads to insolvency and excessive will lead to less profitability. b. Financing of current assets.-: If funds arise it should be invested in short term securities, don’t keep it idle.
2. Net Working Capital The excess of current assets over current liabilities represents net working capital. It may be positive or negative. Net working capital indicates the liquidity of the business.
Significance
a. Maintaining Liquidity Position-: Current assets help in meeting financial obligations. Generally for every one rupee of current asset there should be one rupee of current liability. b. Extent of long term capital in financing current assets-: If there are Rs 100000 current assets and Rs 75000 current liabilities then NWC is Rs 25000, and it supposed to be financed from long term funds.
KINDS OF WORKING CAPITAL
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1.
WORKING CAPITAL MANAGEMENT
Concept of Working Capital Working capital refers to short-term funds, need to meet operating expenses. It refers to the funds; to finance its day-to-day operations. It is concerned with current assets and current liabilities. If a firm can’t maintain a satisfactory level of working capital, it may become insolvent or bankrupt. Broadly there are 2 concepts of working capital, such as: 1. Gross Working Capital (Quantitative Concept) 2. Net working Capital (Qualitative Concept) Both these concepts of working capital have operational significance. The two concepts are not mutually exclusive. The ‘gross concept’ emphasizing the ‘use’ and the ‘net concept’ emphasizes the ‘source’.
1. Gross Working Capital The total current assets are termed as the gross working capital. It is also known as quantitative or circulating capital. It refers to firm’s investment in short term assets such as cash, marketable securities, accounts receivables, prepaid expenses, inventories etc.
Significance
a. Optimum investment in current assets.-: Inadequate working capital leads to insolvency and excessive will lead to less profitability. b. Financing of current assets.-: If funds arise it should be invested in short term securities, don’t keep it idle.
2. Net Working Capital The excess of current assets over current liabilities represents net working capital. It may be positive or negative. Net working capital indicates the liquidity of the business.
Significance
a. Maintaining Liquidity Position-: Current assets help in meeting financial obligations. Generally for every one rupee of current asset there should be one rupee of current liability. b. Extent of long term capital in financing current assets-: If there are Rs 100000 current assets and Rs 75000 current liabilities then NWC is Rs 25000, and it supposed to be financed from long term funds.
KINDS OF WORKING CAPITAL
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1.