Concepts of working capital, Financial Management

CONCEPTS OF WORKING CAPITAL

There are two concepts of Working Capital - Net working capital and Gross Working capital.

1. Gross Working Capital

Gross Working capital relates to the firm's investment in current assets (Short Term Securities, Cash, Debtors, Bills Receivable and Inventory).  Current assets are those assets which can be converted into cash within a year. This idea focuses on - how to optimize investment in current assets and how should they be financed?  In this instance, both excessive and inadequate investment in current assets should be avoided.

2.  Net Working Capital

Net Working capital relates to the variation between current assets and current liabilities.  It may be negative or positive.  This idea is a qualitative concept.  It shows the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of capital. Current assets should be sufficiently in excess of current liabilities to constitute a margin for maturing obligations within the ordinary operating cycle of a business. This idea also covers the question of judicious mix of short-term and long-term funds for financing current assets.

The two concepts of Working Capital are not exclusive rather they have equal significance from management's view point.

Posted Date: 10/16/2012 1:23:21 AM | Location : United States







Related Discussions:- Concepts of working capital, Assignment Help, Ask Question on Concepts of working capital, Get Answer, Expert's Help, Concepts of working capital Discussions

Write discussion on Concepts of working capital
Your posts are moderated
Related Questions
Q. What do you mean by Credit policy? Credit policy: the credit policy of the concern in its dealing with the debtors and the creditors influencly consider the requirement of t

Bond Price is the purchase value of a bond. It can be priced either at a premium, discount or at par. It is important for the prospective buyer to know how to det

Hi I have been working in this for 2 weeks now and I just can''t seem to figure it out. ok lets say Bill is 40 yrs old. His made 72,000 last year had 60,000. in annual expenses,

Evaluate d importance of leverage in a financial management of a small sacle business

importance of Leverage

Woody Construction is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.186 million. The fixed asset will be depreciated straight-lin

discuss the applicability of an operation cycle in a vegetation business

Protected Put A protected put would involve a long put and a long stock. For example - ONGC. Underlying stock = Rs. 809 Buy Mar Rs. 900 Put @ Rs.68.8   Total cos

Types of financial incentive schemes Performance associated pay (PRP) systems e.g. piecework or sales commission Bonuses e.g. supplementary payments for targets or ai

Q. Graphic Presentation of Net Operating Income Approach ? Graphic Presentation of NOI (Net Operating Income) Approach: - NOI (Net Operating Income) approach is explained graph