Management of Working Capital

admin — Mon, 30 Nov 2009 01:02:32 +0000

Working capital management is an important aspect of financial management. In business, money is required for fixed assets and working capital. Fixed assets include land and building, Plant and machinery, furniture and fitting etc. Fixed assets are acquired to be retained in the business for a long period and yield returns over the life of such assets. Working capital, on the other hand, is required for the efficient and effective use of fixed assets. The main objective of working capital management is to determine the optimum amount of working capital required.

Definition of Working Capital

There are two concepts of working capital:

Gross Working Capital Concept
Net Working Capital Concept

Gross Working Capital Concept

According to this concept, working capital means gross working capital which is the total of all the current assets of a business.

Gross Working Capital= Total Current Assets

Definitions favoring this concept are-

“Working Capital means total of Current Assets.”- Mead, Mallott and Field

Persons acknowledge the total of current ass5ets as working capital gives the following arguments in their favors:

(1) Just as fixed assets are considered as the symbol of fixed capital, current assets must also be considered as symbol of working capital.

(2) Any acquisition of fund increases the working capital. This statement proves true according to this concept whereas it does not hold true according to the second concept.

(3) Most of the managers plan their business operations according to the current assets concept because these are the assets used in day-to-day business operations.

(4) Utility of current assets remains the same whether financed from long term loans or short term loans. Hence, the total amount of current assets must be treated as working capital.

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Management of Working Capital