Working Capital Management

Apparel Industry Management 3(3+0)

Lesson 20 : Capital Management

Working Capital Management

Management of working capital is an extremely important area of financial management as current assets represent more than half of the total assets of a business. Fixed assets through essential for a business organization, does not by itself produce revenue or income. Fixed assets act with current assets to generate revenue or income. Therefore, working capital is necessary for utilizing the productive capacity of fixed capital. For shortage of working capital, the enterprise would suffer reduction in earnings due to productive capacity remain unutilized. While, excess working capital leads to extra cost for want of productive capacity. Thus, the amount of working capital in every enterprise, whether manufacturing or non-manufacturing, should be neither more or less than what is actually required. Working capital in business is just live blood in human body. Optimum and appropriate movement of blood through the body is extremely necessary to continue life. Like human blood, the proper circulation of funds(working/circulating capital) is utmost necessary to continue business. If the circulation of working capital becomes weak, the businesses can hardly prosper and service. An enterprise should maintain optimum amount of working capital so as to carry on the productive and distributive activities smoothly. While, the determination of optimum level of working capital involves fundamental decisions to an organization’s liquidity, which in turn are influenced by a tradeoff between profitability and liquidity. Thus, goal of working capital management is to manage the firm’s current assets and liabilities in such a way that satisfactory level of working capital minted

In accounting “Working capital is the difference between the inflow and out flow of funds.” It other words it is the net cash inflow. Working capital is defined as excess of current assets over current liabilities and provision. In other word, it is “net current assets or networking capital.”Working capital can be defined broadly in two different ways i.e. gross working capital and Net working capital.

Gross working capital
Refers to organizations investment in total current assets. Current assets are the assets, which can be, convert in to cash with in an accounting year and include cash, marketable securities, intently etc. it is also known as circulating capital.

Net working capital
Refers to the different between current assets and current liabilities are those claims of outsiders, which are accepted to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses

Symbolically:
NWC = CA – CL.
Where, NWC = Net working Capital CA = Current Assets CL = Current Liabilities
Net working capital can also be defined as that portion of firm’s current assets, which is financed by long-term funds

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Last modified: Wednesday, 23 May 2012, 6:16 AM