Professional Documents
Culture Documents
Management
WORKING CAPITAL
qCurrent assets – Current liabilities
qIt measures how much in liquid assets a
company has available to build its business.
qA short term loan which provides money to buy
earning assets.
qAllows to avail of unexpected opportunities.
qPositive working capital is required to ensure
that a firm is able to continue its operations and
that it has sufficient funds to satisfy both maturing
short-term debt and upcoming operational
expenses. The management of working capital
involves managing inventories, accounts
receivable and payable and cash.
CONSTITUENTS OF WORKING
CAPITAL
CURRENT ASSETS
Inventory
Sundry Debtors
Cash and Bank Balances
Loans and advances
CURRENT LIABILITIES
Sundry creditors
Short term loans
Outstanding expenses
IMPORTANCE OF WORKING CAPITAL
Arranging the sources of
working capital:
It depends mainly upon the availability of
funds and different application of this
working capital. Current assets or working
capital includes mainly three components
Inventories
Cash
Receivables
So, in short we can also say that the working
capital management means to manage all
these three components in the firm.
Types of Working Capital:
There are two broad classifications of the
working capital.
Gross Working Capital
Net Working Capital
There are two more classifications which are
also very important.
Permanent Working Capital
Temporary Working Capital
Gross Working Capital:
Total Current assets
Where Current assets are the assets that can
be converted into cash within an accounting
year & include cash , debtors etc.
Referred as “Economics Concept” since assets
are employed to derive a rate of return.
Aggressive Approach:
Goods Sales
Debtors Bills receivables
Cash
Demerits of Excessive
Working Capital
There may be following problems
It can accumulate unnecessary inventories. Thus
chance of mishandling, theft, wastage of
inventories may occur.
It also indicates poor collection of receivable
and very liberal credit policy regarding
sales. The bad debts will increase it such
situation continues for long time.
It allows to the management to inefficiently
Accumulation of excessive inventories also
leads to speculative profit. This may tend to
make dividend policy liberal, which may create
serious problems in future.
Excessive availability of cash tempts the
executive to spend more.
Demerits of Inadequate
Working Capital :
There may be following problems-
It becomes difficult for the firms to undertake
profitable projects due to shortage of working
capital.
The firm may face problems in implementing the
operating plans and achieve the firm’s profit
target.
It also creates problem in meeting out day-to-day or
routine expenses.
Fixed assets can be utilized more effectively, thus
the overall return may go down.
Due to inadequate working capital firm may loose
some good credit opportunities
The firm may spoil its fame and reputation if it
fails to honour short-term obligations. As a
result, the firm faces tight credit terms.
It directly affects the liquidity positions of the
business firms.