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Working Capital Management

It is concerned with functional area of finance that involves all current assets of a firm. It is dealt with individual current assets and management of working capital. First of all it is required to know the meaning of working capital.

Meaning of Working Capital

It is defined as the invested funds in current assets. Example investment in stocks, cash and other assets. Current assets are essential to use fixed assets profitably. For example a machine can’t be use without raw material. The investment on raw material is mentioned as working capital.

Conceptually working capital can be used in 2 different ways:

a. Gross working capital: Investment in all current assets taken together

b. Net working capital: excess of total current assets over total current liabilities.

With respect to time, working capital is divided into 2 different categories:

a. Permanent Working Capital

b. Temporary Working Capital

Optimum Working Capital / Working Capital Cycle

Factors to be taken into consideration while determining the requirement of working capital are:

a. Production Policies
b. Nature of Business
c. Credit Policy
d. Inventory Policy
e. Abnormal Factors: Strikes & lockout
f. Market Conditions
g. Supply Conditions
h. Business Cycle
i. Growth and Expansion
j. Level of Taxes
k. Dividend Policy
l. Price Level Changes
m. Operating Efficiency

Working capital management is considered with

a. Determining need of working capital
b. Determining optimal levels of investment

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