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WORKING CAPITAL

Working Capital which is defined as all the short term assets used in daily operations. Net Working Capital may be defined as the difference between current assets and current liabilities. working capital management is the functional area of finance that covers all the current accounts of the firm.

Working Capital comprises of two components:

  • Permanent Working Capital
  • Variable Working Capital   
Goals of Working Capital Policies
  • Adequate Liquidity
  • Minimization of Risk
  • Contribute to Maximizing Firm's Value

Factors affecting the Need for Working Capital
  1. Sales Volume
  2. Seasonal and Cyclical Factors
  3. Changes to Technology
  4. Policies of the firm 
Managing Working Capital
It involves two processes:
  • Forecasting Needed Funds
  • Acquiring Funds
Managing Working Capital requires the following actions:
  • Monitoring Levels of Cash, Receivables and Inventory
  • Knowing percentage of funds in Current Accounts
  • Recording time spent managing Current Accounts
How much working capital is needed?
This depends on the following factors:
  1. Size of the Firm
  2. Activities of Firm
  3. Availability of Credit
  4. Attitude towards Profits
  5. Attitude towards Risk
The primary Goal of Working Capital Management is to avoid the risks from inadequate liquidity.
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