Working Capital

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INTRODUCTION

WORKING CAPITAL MANAGEMENT

1. Introduction

2. Need of working capital

3. Gross working capital

4. Net working capital

5. Determinants of working capital

Working capital management

Working capital management is concerned with the problems arise in attempting to manage the current assets,the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which inordinary course of business can be,or,will be, turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash,marketable securities,account receivable and inventory.Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.

The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

Definition:-

According to Guttmann & Dougall-

“Excess of current assets over current liabilities”.

According to park & Gladson-

“The excess of current assets of a business [i.e. cash,accounts receivables,inventories]over current items,owned to employees and others[such as salaries & wages payable,account payable ,taxes owned to government]”.

Need of working capital management

There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert into sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials,WIP, finished goods and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than thefunds available from current liabilities. This is the precise reason why the needs for working capital arise.

Gross working capital and Net working capital

There are two concepts of working capital management.

1. Gross working capital

Gross working capital refers to the firm’s investment current assets. Current assets are the assets which can be converted in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.

2. Net working capital

Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and including creditors, bills payable and outstanding expenses. Net working capital can be positive or negative.

Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying form firm to firm and depending among other things, on the nature of industries. Net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable.

The...
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