Finance -- Working Capital Management

Working Capital Management

Working capital refers to that part of the firm’s capital which is required for financing short term or current assets such as cash, receivables and inventories. It is essential to maintain a proper level of these assets. The scarcity of cash may adversely affect the reputation of the firm. Though sales may go up, the risk of bad debts and cost involved in it may have to be weighted against the benefits. Proper management of working capital is an important area of financial management.

The two components of Working Capital Management are current assets and current liabilities. There are two concepts of working capital :

(i) Balance Sheet Concept: which has further two categories –

• Gross Working Capital – It is the capital invested in total current assets of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of time.
• Net Working Capital – It referred as the excess of current assets over current liabilities.

Net Working Capital = Current assets – Current Liabilities

(ii) Operating Cycle or circular Flow Concept:
Operating Cycle of cash flow in working capital management can be explained from the diagram below -




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The other important topics covered under Working Capital Management are –

1. Importance of adequate working capital

2. Factors determining the working capital requirements

3. Management of working capital

4. Determining the working capital financing mix

5. Methods of estimating working capital requirements

6. Zero working capital approach

7. New trends in financing working capital by banks.

8. Working capital financing

9. Percentage of sales method, regression analysis method, projected balance sheet method.

10. Operating cycle method

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