Working Capital Management

Introduction:

Working capital management is the excess of current assets over current liabilities. It is also called Net Working Capital or Working Capital Ratio. It involves managing the different components of both current assets as well as current liabilities.

A positive working capital means that the company is able to pay off the short term liabilities. Negative working capital means that the company is currently unable to meet its short term liabilities with its current assets.

Working Capital = Current Assets – Current Liabilities.

Objective of Working Capital Management:

The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained i.e., it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds, which earn no profits for the business. Working capital management policies of firm have a great effect on its profitability, liquidity and structural health of the organization.

Kinds of Working Capital:

Working capital may be classified in two ways:

1. On the basis of concept

2. On the basis of time

On the basis of Concept:

Gross Working Capital: The gross working capital is the capital invested in total current assets of the enterprise.

Net Working Capital: Net working capital is the excess of current assets over current liabilities.

On the basis of Time:

Permanent or Fixed Working Capital:

Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets.

Temporary or Variable Working Capital:

Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies.

Variable working capital can be further as seasonal working capital and special.

The capital required to meet the seasonal needs of the enterprise is called seasonal working capital.

Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research, etc.