WORKING CAPITAL MANAGEMENT
CONTENTS Introduction Meaning of Working Capital Scope of Working Capital Management Working Capital Needs of Different Types of Businesses Relationship of Working Capital Management to Business Solvency Operating Cycle and its Relevance for Working Capital Management Managing Working Capital Estimation of Working Capital Requirements Working Capital Management 2
Introduction ◦ Traditionally, working capital has been defined as the firm’s investment in current assets. Current assets are required to be maintained for day-to-day operations of the firm. ◦ The assets keep changing from one form to another from stocks, receivables and cash. ◦ Working capital decisions are of tremendous importance for any firm because: Such decisions affect the business’s liquidity position. They provide learning experience and require management interventions at regular intervals. Working Capital Management 3
Features Of Working Capital Decisions Working capital decisions are typically ◦ Short-term financial decisions, i.e., working capital decisions typically affect the cash flows of the firm for a shorter time frame, extending up to a maximum of one year, normally. ◦ The concepts of risk and time value of money are less pertinent to working capital decision- making. ◦ They are modified from time to time unlike capital budgeting decisions, which are one-time. ◦ Concept of working capital is dynamic as market conditions with respect to credit, stocking etc change more frequently. Working Capital Management 4
Meaning Of Working Capital Working capital is subject to multiple connotations. From the accountants’ perspective working capital refers to the differential of current assets and current liabilities. From production managers ’ view it refers to the total funds that a firm needs to carry out its day- to-day operations. From the finance managers ’ angle it implies the total investment made in current assets. Working capital integrates Purchasing – Production – Marketing functions. The adequacy of working capital would enable smother functioning of the three functions. Working Capital Management 5
Meaning Of Working Capital Working capital, alternatively referred to as current or circulating capital, is the investment made by firms in their current assets. Current assets comprise all assets that the firm expects to convert into cash within the year. This includes ◦ Cash and bank balance (already in cash form), ◦ marketable securities, ◦ accounts receivable, and ◦ inventories. Working Capital Management 6
Gross And Net Working Capital ◦ Gross working capital (GWC) is defined as investment in current assets.
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