Working Capital Essay

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WORKING CAPITAL MANAGEMENT

“More business fails for lack of cash than for want of profit”
Efficient management of working capital is one of the pre-conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s liquidity. Holding of excess working capital results in the reduction of the profitability. But the proper estimation of working capital actually required, is a difficult task for the management because the amount of working
Funds are also needed for short-term purposes for the purpose of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as working capital. In simple words, working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Working capital is a valuation metric that is calculated as current assets minus current liabilities. Working capital is also known as operating capital.
Concept of working capital
There are two concepts of working capital:
1. Gross working capital
It refers to the firm’s investment in total current assets or circulating assets.

2. Net working capital (defined in two ways)
(i) It is the excess of current assets over current liabilities.
(ii) It is that portion of a firm’s current assets which is financed by long-term funds.

NEED FOR WORKING
It should neither have excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds, which earn no profit for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations, which ultimately results in production interruptions, and lowering down the profitability. It will be interesting to understand the relation between working capital, risk and return. In a manufacturing concern, it is generally accepted that higher levels of working capital decrease the risk and decrease the profitability too. While lower levels of working capital increase the risk but have the potentiality of increasing the profitability

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