Whatever be the size of the business, working capital is the life blood and controlling nerve centre of that business. Thus, working capital management is very significant facet of financial management. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point if view. Excessive working capital implies idle funds which earn no profits for the firm while paucity of working capital not only impairs the firm’s profitability but also results in business operation interruptions and inefficiencies. An overall control over working capital can ensure a proper functioning of the business operations. Thus, it must be admitted that in real world situation efficiency with which working capital is managed in a firm is of great significance for its overall well being.
2. Introduction
Whatever be the size of the business, working capital is the life
blood and controlling nerve centre of that business. Thus,
working capital management is very significant facet of financial
management. Both excessive as well as inadequate working
capital positions are dangerous from the firm’s point if view.
Excessive working capital implies idle funds which earn no
profits for the firm while paucity of working capital not only
impairs the firm’s profitability but also results in business
operation interruptions and inefficiencies. An overall control
over working capital can ensure a proper functioning of the
business operations. Thus, it must be admitted that in real world
situation efficiency with which working capital is managed in a
firm is of great significance for its overall well being.
3. Meaning of Working Capital
• In simple terms, working capital is the amount of funds which a
business firm uses to finance its day-to-day working on
operations. It can also be regarded as that portion of the firm’s
total capital which is employed in short term operations or in
current assets.
•Working capital also refers to as circulating capital because
funds invested in current assets of a company changed in
ordinary course of business from one form to another, as for
example, from cash to inventories, inventories to receivables,
receivables into cash.
5. Analysis of
WC
Balance Sheet
Approach
Based on
Concept
Gross WC Net WC
Based on
Time
Permanent or
Fixed WC
Regular WC Reserve WC
Temporary or
variable WC
Seasonal WC Special WC
Operating
Cycle
Approach
Conventional
Operating
Cycle
Weighted
Operating
Cycle
Analysis of working capital can be taken up on the basis of the following two approaches:
6. Working Capital Management
• The term ‘working capital management’ refers to the
overall administration of current assets and current
liabilities of the business firm. The basic objective of
working capital management is to manage the firm’s
current assets and current liabilities in such a way that a
satisfactory level of working capital is maintained. It
ultimately assist in increasing the overall profitability of
the firm. Each element of working capital should be
periodically examined and it should ensure that the
intrinsic value of all the elements of current assets is
maintained intact. In other words, a firm should neither
have too high nor too low investment in working capital
because both of them will adversely affect the profitability
of the firm.
,
7. Importance of Working Capital Management
• Shows positive relationship between sales revenue and current
assets.
•Maintaining desired level of liquidity.
•Maintaining steady profitability.
•Vital for small firms.
8. Determinants of Working Capital Requirement
•Nature of Business
•Size of Business
•Manufacturing Cycle
•Production Policy
•Seasonality of Operations
•Credit Policy of the firm
•Dividend Policy
9. Sources of Working Capital Financing
Financing of Permanent or Fixed Working Capital:
Issue of share
Issue of debentures
Ploughing back of profit
Loan from financial institutions
Financing of Temporary or Variable Working Capital:
Trade Credit
Advances
Factoring
Commercial paper
Government assistance
.