Working Capital Management

Current assets Current liabilities It measures how much in liquid assets a company has available to build its business. A short term loan which provides money to buy earning assets. Allows to avail of unexpected opportunities. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

Working capital
An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

Working Capital Management

Decisions relating to working capital and short term financing are referred to as working capital management. Short term financial management concerned with decisions regarding to CA and CL. Management of Working capital refers to management of CA as well as CL. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. These involve managing the relationship between a firm's short-term assets and its short-term liabilities

Working Capital Goal

The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing shortterm debt and upcoming operational expenses. Businesses face ever increasing pressure on costs and financing requirements as a result of intensified competition on globalised markets. When trying to attain greater efficiency, it is important not to focus exclusively on income and expense items, but to also take into account the capital structure, whose improvement can free up valuable financial resources

 Active working capital management is an extremely effective way to increase enterprise value. Optimising working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs, thereby increasing liquidity for strategic investment and debt reduction. Process optimisation then helps increase profitability.

 The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables, inventories, and payables.

Gross Working Capital

Total Current assets Where Current assets are the assets that can be converted into cash within an accounting year & include cash , debtors etc. Referred as Economics Concept since assets are employed to derive a rate of return.

Net Working Capital

CA CL Referred as point of view of an Accountant. It indicates liquidity position of a firm & suggests the extent to which working capital needs may be financed by permanent sources of funds.

CONSTITUENTS OF WORKING CAPITAL

CURRENT ASSETS
Inventory Sundry Debtors Cash and Bank Balances Loans and advances

CURRENT LIABILITIES
Sundry creditors Short term loans Provisions

 Short Life Span I.e. cash balances may be held idle for a week or two , thus a/c may have a life span of 30-60 days etc. Swift Transformation into other Asset forms I.e.each CA is swiftly transformed into other asset forms like cash is used for acquiring raw materials , raw materials are transformed into finished goods and these sold on credit are convertible into A/R & finlly into cash.

Matching Principle
If a firm finances a long term asset(like machinery) with a S-T Debt then it will have to be periodically finance the asset which will be risky as well as inconvenient. i.e. maturity of sources of financing should be properly matched with maturity of assets being financed. Thus Fixed Assets & permanent CA should be supported with L-T sources of finance & fluctuating CA by S-T sources.

Need for Working Capital

As profits earned depend upon magnitude of sales and they donot convert into cash instantly, thus there is a need for working capital in the form of CA so as to deal with the problem arising from lack of immediate realisation of cash against goods sold. This is referred to as Operating or Cash Cycle . It is defined as The continuing flow from cash to suppliers, to inventory , to accounts receivable & back into cash .

Need for Working Capital

Thus needs for working capital arises from cash or operating cycle of a firm. Which refers to length of time required to complete the sequence of events. Thus operating cycle creates the need for working capital & its length in terms of time span required to complete the cycle is the major determinant of the firms working capital needs.