Working Capital Concept
1.1 WORKING CAPITAL CONCEPTS
Business activity
Business activity is dynamic in character and subject to wide fluxions. The movement from working capital to income and profits and back to working capital is one of the most important characteristics of business administration. This operation is concerned with the deployment of funds with the hope that they will generate returns, rendering an additional amount called profit. If the operations of an enterprise are to run smoothly, proper relation ship between fixed capital and current capital must be maintained. Its main aim is to use business funds in which a manner that earning are maximized. Financial Management provided a framework for selecting a proper course of action and deciding a viable commercial strategy. This objective can be achieved by :-
a) Profit maximization
b) Wealth maximization
Funds are needed for short-term as well long term purposed. In short term we say current operation of the business. For a manufacturing unit payment for raw materials and wages and for meeting routine expenses. All the goods. Which are manufactured in a given time, may not be sold in the period. Naturally funds are blocked in inventory. It is also the fact that all goods may not be sold against ready cash. Some of the goods may be sold on credit basis. The capital is closely related to the term funds and has two meaning. It is used to mean current assets minus current liabilities. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly.
It may be clear that objective of working capital management is to maintain a satisfactory level of working capital. In other words, the current assets should not be sufficient enough to cover the current liabilities but at the same time it should also ensure the reasonable amount of safety margin. This is possible only when the different components of working capital are properly balanced.
1.1.1 Working Capital Concepts
There
Business activity
Business activity is dynamic in character and subject to wide fluxions. The movement from working capital to income and profits and back to working capital is one of the most important characteristics of business administration. This operation is concerned with the deployment of funds with the hope that they will generate returns, rendering an additional amount called profit. If the operations of an enterprise are to run smoothly, proper relation ship between fixed capital and current capital must be maintained. Its main aim is to use business funds in which a manner that earning are maximized. Financial Management provided a framework for selecting a proper course of action and deciding a viable commercial strategy. This objective can be achieved by :-
a) Profit maximization
b) Wealth maximization
Funds are needed for short-term as well long term purposed. In short term we say current operation of the business. For a manufacturing unit payment for raw materials and wages and for meeting routine expenses. All the goods. Which are manufactured in a given time, may not be sold in the period. Naturally funds are blocked in inventory. It is also the fact that all goods may not be sold against ready cash. Some of the goods may be sold on credit basis. The capital is closely related to the term funds and has two meaning. It is used to mean current assets minus current liabilities. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly.
It may be clear that objective of working capital management is to maintain a satisfactory level of working capital. In other words, the current assets should not be sufficient enough to cover the current liabilities but at the same time it should also ensure the reasonable amount of safety margin. This is possible only when the different components of working capital are properly balanced.
1.1.1 Working Capital Concepts
There