Working Capital Management

Topics: Inventory, Financial ratios, Balance sheet Pages: 60 (9622 words) Published: April 2, 2010



Working capital may be regarded as life blood of a business. Working capital management is a process of planning and controlling the level and mix of the current assets of the firm as well as financing these assets. A study of working capital is of major importance to internal and external analysis because of its close relationship with the day-to-day operation of a business. Even in a well-established business with a long history of successful operation, careful attention to the management of working capital results in greater profitability. Funds which are needed for short term purpose for the purchase of raw materials, payment of wages and other day-to-day expenses are known as working capital.

The goal of working capital management is to manage each of the firm’s current assets and current liabilities. Working capital is also known as circulating capital or current capital or revolving capital. Capital required for a business can be classified under two main categories viz; Fixed capital

Working capital
Every business needs funds for two purposes for its establishment and carryout its day-to-day operations.
Long-term funds are required to create production facilities such as purchase of plant, machinery, land, building, furniture’s, etc., Investment in these assets represent that part of the firms capital which is permanently blocked and it is called as fixed capital. Funds are also needed for short-term purpose for the purchase of raw materials, payment of wages and other day-to-day expenses. These funds are known as working capital.

The working capital may rightly to be called as the circulating or revolving capital, because current asset keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. 1.1.1. DEFINITIONS

According to Genestenberg “Circulating capital means current assets of a company that are changed in the ordinary course of business from one from to another”.
According to the Institute of Chartered Accountant of India “Working capital means the funds available from day-to-day operations of an enterprise”.
In the words of Shubin, “Working capital is the amounts of funds necessary to cover the cost of operating the enterprise”. 1.1.2. TYPES OF WORKING CAPITAL
(a) Permanent working capital
It means the minimum amount of investment in all current assets which is regarded at all times to carry on minimum level of current asset is known as permanent working capital. Tandon committee has named it as “Core current assets” Features of permanent working capital

1.Amount of permanent working capital remains in the business in one form or another. 2.There is a positive correlation between the amount of permanent working capital and the size of the business. 3.Permanent working capital should be financial out of long term funds.

(b) Temporary working capital
This is also called the fluctuating or variable working capital. The amount of temporary working capital keeps on changing depending upon the changes in production and sales. The extra working capital required to support the changing production and sales activities is known as temporary working capital. (c)Gross working capital

It is the amount of funds invested in various components of current assets. This concept has type following advantages. 1.Financial management is mainly concerned with management of current assets ( Gross working capital)

2.It enables a firm to release the greatest returns on its investments. 3.It enables a firm to plan and control the funds at its disposal. 4.It helps in the fixation of various areas of financial responsibility. (d) Net working capital

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