Working Capital Mgt

Topics: Inventory, Working capital, Generally Accepted Accounting Principles Pages: 8 (2105 words) Published: October 20, 2010
Working Capital


Submitted to:Submitted by:

Mr. Mukesh HansSwati Chaudhry

Working Capital Management

The working capital management is a delicate area in the field of financial management. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working Capital’.

The ‘Working Capital’ can be categorized, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without:

(i)adequate supply of raw materials for processing;
(ii)cash to pay for wages, power and other costs;
(iii)creating a stock of finished goods to feed the market
demand regularly.
(iv)the ability to grant credit to its customers.

There are two concepts of working capital:
1. Gross working capital
2. Net working capital

In broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Current assets are those which in the ordinary course of business can be converted into cash within a short period of normally one accounting year.


1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working capital is the excess of current assets over current liability, or, say:


Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business.


1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation.
6. Bills payable.
7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits. The gross concept is sometimes preferred to the net concept of working capital for the following reasons: 1. It enables the enterprise to provide correct amount of working capital at correct time. 2. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. 3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. 4. This concept is also useful in determining the rate of return on investments in working capital.

The net working capital concept, however, is also important for following reasons:

1.It is qualitative concept, which indicates the firm’s ability to meet to its operating expenses and short-term liabilities. 2.IT indicates the margin of protection available to the short term creditors. 3....
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