Working capital management and its concepts

Working capital management

Working capital is also called revolving, circulating or short term capital. Every business require the funds for its establishment which is called fixed capital and require funds to carry out its day to day operations like purchase of raw material, payment of wages etc. which is called working capital. Thus, working capital is the capital required to finance the short term or current assets such as cash, securities, debtors, stock.

2 Concepts of working capital

 Generally there are two concepts of working capital. They are gross working capital and net working capital. But they are defined by different names. They are explained below:

1) In broad sense: working capital refers to gross working capital. It is also defined as financial concept or going concern concept. It means the capital invested in the current assets of the firm. Current assets mean the assets which can be converted into cash easily or within one accounting period. It helps in determining the return on investment in working capital and providing correct amount of working capital at right time.

 2) In narrow sense: working capital refers to net working capital. It is also defined as accounting concept. It means excess of current assets over current liabilities. It helps in finding out firm’s capability to meet short term liabilities as well as indicates the financial soundness of the enterprise.

 Net working capital = current assets – current liabilities

 Net working capital can be +ve or –ve. When current assets are more than the current liabilities than working capital is +ve and when current assets are less than the current liabilities than working capital is –ve.

At the end we can say, that both the working capital are important but according to the suitability gross working capital is suitable for companies having separate ownership or management while net working capital is suitable for sole trader companies or partnership firms.

 

 


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