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
Earn out arrangements   Consideration could be delayed and paid only upon achievement of certain criteria. For illustration the predator company may pay additional cash if acq

Leveraging can be described as an investing principle where funds are borrowed to invest in a part of the securities. The manager hopes to earn a return that is g

Define the in- order-driven according to trade intermediation. In- order-driven markets: In order-driven markets, buyers and sellers trade unswervingly without any intermedi

Q. What is the basic Approach of the financial management ? 1) The first approach view finance as to providing the funds needed by a business on the most suitable terms. This ap

Question #1: Review the Anthony’s Orchard case study in the unit resources. Consider the following assumptions: • The company, according to Anthony’s Orchard Strategic Plan, is h

Evaluate the importance of leverages in financial management of small scale companies

Repurchase agreement is a contract wherein the seller of a security agrees to buy back the same security from the purchaser at a specified price and time. It is also

Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove

Which formula would you use to solve for the payment needed for a car loan if you know the interest rate, length of the loan, and the borrowed amount?  Describe. To solve for k

Q. Location of lifting anchors in precast concrete units? It is desirable that position of anchors be located symmetrical to the centre of gravity of precast concrete units. Or