Working Capital Management
WORKING CAPITAL MANAGEMENT
Description also available in video format (attached
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·
Working Capital can be
defined as the firm’s holding of current or short term assets such as
o
Cash
o
Receivables
o
Inventory
o
Marketable securities
·
These items are also referred to as
circulating capital
·
Working Capital Management is concerned with the problems that arise in attempting
to manage the
o
Current assets
o
Current liabilities
o
& interrelation s that exist between them
Classification
& Concept of Working Capital
·
Classification
o
On the basis of Concept
§ Gross Working
Capital
· GWC refers to the firm’s total investment in current
assets
· Current assets are the assets which can be converted into cash within an
accounting year like
o
Short term securities
o
Debtors
o
Stock
· It focuses on the
o
Optimization of investment
o
Financing of current assets
§ Net Working Capital
· NWC refers to the difference between current assets &
current liabilities
· Current liabilities
are those claims of outsiders which are
expected to mature for payment within an accounting year like
o
Creditors
o
Bills payable
o
Outstanding expenses
· It focuses on the liquidity position of the firm
o
On the basis of Time
§ Permanent Working
Capital
· A minimum level of current assets, which is required by a
firm to carry on its business operations
§ Temporary Working
Capital
· The extra working capital needed to support the changing
production and sales activities of the firm
·
Concept
o
Balance Sheet Concept
§ There are two interpretations of working capital under
the balance sheet concept
· Excess of current assets over current liabilities
· Gross or total current assets
o
Operating Cycle Concept
§ Operating cycle is the time duration required to convert
sales, after the conversion of resources into cash
§ This cycle involves three phases
· Acquisition of resources (like raw material, labor,
power & fuel)
· Manufacture of product (conversion of raw material into
finished goods)
· Sale of the product (for cash or on credit)
Determinants,
Advantages and Disadvantages of Working Capital Management
· Determinants
o
Nature of business
o
Size of the business
o
Production Policy
o
Seasonal variation
o
Credit policy
· Advantages
o
Solvency of business
o
Goodwill
o
Easy loans
o
Cash discounts
o
Regular supply of raw material
· Disadvantages
o
Cannot pay short term obligations in time
o
Loose of goodwill
o
Difficult to exploit favorable market condition
o
Difficult to pay day to day expenses of
operations
o
Return on investment fall with the shortage
of working capital
Video
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