Concept of Working Capital
Concept of working capital.
Working capital refers to short terms funds to met operating expenses. To quote Ramamoorthy, It refers to the funds, which a company must possess to finance its day – to –day operations “ it is concerned with the management of the firm’s current assets and current liabilities. It is concerned with the management fo the firm’ current assets, and current liabilities. If a firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy.
There are two concepts of working capital commonly found in the existing literature of finance such as
1- Gross working capital ( quantitative concept)
2- Net working capital ( qualitative concept )
Gross working capital
According to this concept the total current assets are termed as the gross working capital or circulating capital. Total current assets include, cash, marketable securities, accounts receivables, inventory, prepaid expenses, advance payment of tax etc. this concept also called as quantitative or broader approach. TO quote Weston and Brigham , “ gross working capital refers to firms investments in short term assets such as cash, short term securities, accounts receivables and inventories” . According to Walker, “ use of this concept is helpful in providing for the current amount of working capital at the right time so that the firm is able to realize the greatest return on investment” . The supporters of this concept like Mead, field, and baker and Malott, argue that the management is very much concerned with the total current assets as they constituent the total funds available for operating process
Significance
Gross working capital concept focuses attention on the two aspects of current assets management.
1- Optimum investment in current assets: - investment in current assets must be just adequate to the needs of the firm it should not be excessive or inadequate. Inadequate working capital can
Working capital refers to short terms funds to met operating expenses. To quote Ramamoorthy, It refers to the funds, which a company must possess to finance its day – to –day operations “ it is concerned with the management of the firm’s current assets and current liabilities. It is concerned with the management fo the firm’ current assets, and current liabilities. If a firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy.
There are two concepts of working capital commonly found in the existing literature of finance such as
1- Gross working capital ( quantitative concept)
2- Net working capital ( qualitative concept )
Gross working capital
According to this concept the total current assets are termed as the gross working capital or circulating capital. Total current assets include, cash, marketable securities, accounts receivables, inventory, prepaid expenses, advance payment of tax etc. this concept also called as quantitative or broader approach. TO quote Weston and Brigham , “ gross working capital refers to firms investments in short term assets such as cash, short term securities, accounts receivables and inventories” . According to Walker, “ use of this concept is helpful in providing for the current amount of working capital at the right time so that the firm is able to realize the greatest return on investment” . The supporters of this concept like Mead, field, and baker and Malott, argue that the management is very much concerned with the total current assets as they constituent the total funds available for operating process
Significance
Gross working capital concept focuses attention on the two aspects of current assets management.
1- Optimum investment in current assets: - investment in current assets must be just adequate to the needs of the firm it should not be excessive or inadequate. Inadequate working capital can