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Working Capital Management

Working capital - definition

Working capital The amount of capital that covers current assets Net working capital Current assets minus current Liabilities Current assets Circulating assets as opposed to long-term (fixed) assets; the same true with current liabilities (circulating sources of cash) Current liabilities are appropriate source of finance for current assets. Total investment in the company then is divided into investment in operations and investment in fixed assets.

Interrelationship of the investment in operations may be represented in the operating cycle that includes: acquisition of raw materials and packaging, use of materials and packaging in manufacturing process to create work in progress (semi-finished goods) Use of materials, packaging and work in progress to complete finished goods,despatch of finished goods from warehouses and delivery to customers,recording as sales by the company its deliveries to customers, use of cash resources to pay overheads, salaries,use of cash resources to pay trade creditors and other expenses.

Current assets
Current assets part of assets that have the form of cash or that convert into cash within one year (see the structure of the assets side of the balance sheet!) Characteristics of current assets: - short-term character,- rather high liquidity


Internal function to secure uninterrupted circulation of assets and capital Liquidity function to secure solvency Reserve function some current assets are a reserve against different risks Security function some assets can be collateral to be pledged when applying for loans

Permanent working capital Temporary current assets Groups of current assets (depending on form)

stock (production stock, work-in-process, finished goods) Trade debtors (accounts receivable), Cash (cash, current bank accounts, short-term securities) working capital management consists of management of stock, management of receivables, cash management

Production supply (raw materials) the initial input into the production process Work-in-process (semi-finished goods) items beyond the raw material stage but not yet at the completed product stage Finished goods completed goods

Nature of Enterprise
The nature and the working capital requirements of an enterprise are interlinked.
While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise

Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own production policy,some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them

The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.

Market Condition

If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.

Availability of Raw Material

If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large WC is required.

Growth and Expansion

Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.

Price Level Changes

Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.