Working Capital Management
Rohith U J
• Nature of working capital management
• Working capital cycle
• Types of working capital
• Factors determining working capital
• Methods of estimation
• Advantages and Disadvantages
The process of managing activities and processes related to working
capital. This level of management serves as a check and balances system to
ensure that the amount of cash flowing into the business is enough to sustain
the company's operations. This is an ongoing process that must be evaluated
using the current level of assets and liabilities. Working capital management
may involve implementing short-term decisions that may or may not carry
over from one earnings period to the next.
• According to the definition of Mead, Baker and Malott, “Working
Capital means Current Assets”.
• According to the definition of J.S.Mill, “The sum of the current asset is
the working capital of a business”.
• Working capital management (WCM) is defined as the management of
short-term liabilities and short-term assets. The process is used
continuously to operate and generate cash flow to meet the need for short-
term obligations and daily operational expenses.
• For the purchase of raw materials, components and spares.
• To pay wages and salaries.
• To incur day to day expenses and overhead costs such as fuel, power, and
office expenses etc.
• To provide credit facilities to customers etc.
• It is used for purchase of raw materials, payment of wages and expenses.
• It changes form constantly to keep the wheels of business moving.
• Working capital enhances liquidity, solvency, creditworthiness and
reputation of the enterprise.
• It generates the elements of cost namely: Materials, wages and expenses.
• It enables the enterprise to avail the cash discount facilities offered by its
• It helps improve the morale of business executives and their efficiency
reaches at the highest climax.
• It facilitates expansion programs of the enterprise and helps in maintaining
operational efficiency of fixed assets.
• It helps measure profitability of an enterprise. In its absence, there would be neither
production nor profit.
• Without adequate working capital an entity cannot meet its short-term liabilities in time.
• A firm having a healthy working capital position can get loans easily from the market due
to its high reputation or goodwill.
• Sufficient working capital helps maintain an uninterrupted flow of production by
supplying raw materials and payment of wages.
• Sound working capital helps maintain optimum level of investment in current assets.
• It enhances liquidity, solvency, credit worthiness and reputation of enterprise.
• It provides necessary funds to meet unforeseen contingencies and thus helps the
enterprise run successfully during periods of crisis.
Basis of nature
• Working capital can be classified with the help of the following two
• Gross Working Capital is the general concept which determines the working
capital concept. Thus, the gross working capital is the capital invested in total
current assets of the business concern.
• Gross Working Capital is simply called as the total current assets of the concern.
GWC = CA
• Net Working Capital is the specific concept, which, considers both current assets
and current liability of the concern.
• Net Working Capital is the excess of current assets over the current liability of
the concern during a particular period.
• If the current assets exceed the current liabilities it is said to be positive working
capital; it is reverse, it is said to be Negative working capital.
NWC = C A – CL
• Current Assets
These are those assets which change their form within a short period of time,
generally within one year.
Debtors, B/R, Cash & Bank balance, Prepaid expenses etc.
• Current Liabilities
These are those liabilities which are payable within a short period of time,
generally within one year.
Creditors, B/P, Bank o/d, Short term loan, Proposed dividend etc.
1. Nature of business
2. Size of business
3. Production process
4. Requirement of cash
5. Banking relations
6. Business growth and expansion
7. Profit margin
8. Seasonal nature of business
1. Operating cycle method
2. Traditional or forecasting method
3. Projected balance sheet method
4. Profit and loss adjustment method
5. Sales forecasting method
• It helps the business concern in maintaining the goodwill.
• It can arrange loans from banks and others on easy and favorable terms.
• It enables a concern to face business crisis in emergencies such as
• It creates an environment of security, confidence, and over all efficiency in
• It helps in maintaining solvency of the business.
• Rate of return on investments also fall with the shortage of working
• Excess working capital may result into over all inefficiency in
• Excess working capital means idle funds which earn no profits.
• Inadequate working capital can not pay its short term liabilities in time.