introduction of working capital
Chapter – 3 analysis and interpretation
Introduction to working capital
“Working Capital is the Life-Blood and Controlling Nerve Center of a business”
The working capital management precisely refers to management of current assets. A firm’s working capital consists of its investment in current assets, which include short-term assets such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets and current liabilities.
Working Capital = Current Assets-Current Liabilities
There are two major concepts of working capital:
Gross working capital
Net working capital
Gross working capital:
It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
Significance Of Working Capital Management
The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account for half of its total assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has the effect on company's risk, return
Introduction to working capital
“Working Capital is the Life-Blood and Controlling Nerve Center of a business”
The working capital management precisely refers to management of current assets. A firm’s working capital consists of its investment in current assets, which include short-term assets such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets and current liabilities.
Working Capital = Current Assets-Current Liabilities
There are two major concepts of working capital:
Gross working capital
Net working capital
Gross working capital:
It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
Significance Of Working Capital Management
The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account for half of its total assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has the effect on company's risk, return