Working Capital

Topics: Inventory, Working capital, Finance Pages: 49 (15383 words) Published: February 15, 2011
2.5 Working Capital
This section includes: Definition and classification of working capital Determinants of Working Capital Measurements of Working Capital Working Capital Financing Management of Working Capital Inventory management Cash Management Receivables Management INTRODUCTION : The term working capital is commonly used for the capital required for day-to-day working in a business concern, such as for purchasing raw material, for meeting day-to-day expenditure on salaries, wages, rents rates, advertising etc. But there are much disagreement among various financial authorities (Financiers, accountants, businessmen and economists) as to the exact meaning of the term working capital. DEFINITION AND CLASSIFICATION OF WORKING CAPITAL : Working capital refers to the circulating capital required to meet the day to day operations of a business firm. Working capital may be defined by various authors as follows: 1. 2. 3. According to Weston & Brigham - “Working capital refers to a firm’s investment in short term assets, such as cash amounts receivables, inventories etc. Working capital means current assets. —Mead, Baker and Malott —J.S.Mill “The sum of the current assets is the working capital of the business”

Working capital is defined as “the excess of current assets over current liabilities and provisions”. But as per accounting terminology, it is difference between the inflow and outflow of funds. In the Annual Survey of Industries (1961), working capital is defined to include “Stocks of materials, fuels, semi-finished goods including work-in-progress and finished goods and by-products; cash in hand and bank and the algebraic sum of sundry creditors as represented by (a) outstanding factory payments e.g. rent, wages, interest and dividend; b) purchase of goods and services; c) short-term loans and advances and sundry debtors comprising amounts due to the factory on account of sale of goods and services and advances towards tax payments”. The term “working capital” is often referred to “circulating capital” which is frequently used to denote those assets which are changed with relative speed from one form to another i.e., starting from cash, changing to raw materials, converting into work-in-progress and finished products, sale of finished products and ending with realization of cash from debtors. Working capital has been described as the “life blood of any business which is apt because it constitutes a cyclically flowing stream through the business”. Fianancial Management & international finance


Financial Management Decisions COST-VOLUME-PROFIT ANALYSIS
Working Capital may be classified in two ways a) Concept based working capital b) Time based working capital

Working Capital

Concept based

Time based

Gross Working Capital

Net Working Capital

Negative Working Capital

Permanent or Fixed Working Capital Seasonal Working Capital

Temporary or Variable Working Capital Special Working Capital

Regular Working Capital

Reserve Working Capital

Concepts of working capital 1. Gross Working Capital: It refers to the firm’s investment in total current or circulating assets. 2. Net Working Capital: The term “Net Working Capital” has been defined in two different ways: i. It is the excess of current assets over current liabilities. This is, as a matter of fact, the most commonly accepted definition. Some people define it as only the difference between current assets and current liabilities. The former seems to be a better definition as compared to the latter.

ii. It is that portion of a firm’s current assets which is financed by long-term funds. 3. Permanent Working Capital: This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon Committee has referred to this type of working capital as...
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