AN OVERVIEW OF WORKING CAPITAL MANAGEMENT
Every Firms or business used some funds to meet their day to day transactions. This fund is known as working capital. In general term working capital is a part of firm’s capital which is utilized as current assets. Current assets refer to cash, bank deposit, debtors, inventories, marketable securities etc.
The working capital played very important role in financial management of a business. It is mandatory requirement of every business that they keep adequate working capital for smooth running of its operations. It is not a good practice that we should have keep excess working capital or less working capital because in both situations, firm’s profitability and liquidity position have negative effects. Therefore, it is very necessary to maintain adequate working capital.
To maintain the satisfactory level of working capital between firm’s current assets and current liabilities is the primary objective of Working Capital.
To ensure proper liquidity and higher profitability of the firm, working capital should be managed very carefully and wisely. Working capital helps the firm to face the competition in the market and increase the efficiency of the firm to face the challenges.
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:
ü Balance sheet concept or traditional concept.
ü Operating cycle concept.
BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT
Balance Sheet concept or traditional concept shows the position of the firm at a certain point of time. It is calculated on the basis of balance sheet prepared at a specific date. In this method there are two types of working capital.
ü Gross working capital
ü Net working capital
GROSS WORKING CAPITAL
It refers to a firm’s investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current is quantitative aspect of working capital which emphasizes more on quantity than on its quality, but it fails to reveal the true picture of the financial position of the business because every increase in current liabilities will decrease the gross working capital.
NET WORKING CAPITAL
It is difference between the current assets and current liabilities or the excess of total current assets over total current liabilities. It can also be defined as that part of a firm’s current asset which is financed with long term funds. It may be either negative or positive. When the current assets exceed the current liabilities, the working capital is positive and vice-versa.