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
what is amount of cash dividend if investor buys share of 100 at premium of 400.

Dividend yield plus growth in dividend method When the dividends of the firm are predictable to grow at a constant rate and the dividend payout ratio is constant, this techniq

Potential drawbacks of divestment - There may be some loss of economies of scale. Fixed overheads would have a lower capacity to recover them. - Cash generated may not be

Q. What are the misstatements? A Misstatement is Inconsequential - If a reasonable person would determine after considering the possibility of further undetected misstatement

Bond management evolution to some extent is linked to the increased volatility of the interest rate term structures which is in existence since seventies. Bond valuatio

Coverage ratios give the relationship between the financial charges of a firm and its ability to service them. The four most commonly used coverage ratios are:

Time Series and Demand Forecasting   The process of budgeting in many organizations starts with a forecast of demand for the products in the forthcoming year and the sales f

Sunk Cost This is a cost which has already been incurred and cannot be affected through present or future decisions.


Company X is expected to maintain a constant 7% growth rate in their dividends, indefinitely. If company X has a dividend yield of 4%, what is the required return on their shares?