Introduction - Working Capital, Accountancy and Financial Management | Accountancy and Financial Management - B Com PDF Download

Introduction
Working capital management is also one of the important parts of the financial management. It is concerned with short-term finance of the business concern which is a closely related trade between profitability and liquidity. Efficient working capital management leads to improve the operating performance of the business concern and it helps to meet the shortterm liquidity. Hence, study of working capital management is not only an important part of financial management but also are overall management of the business concern.
Working capital is described as the capital which is not fixed but the more common uses of the working capital is to consider it as the difference between the book value of current assets and current liabilities.
This chapter deals with the following important aspects of the working capital management.

• Meaning of Working Capital
• Concept of Working Capital
• Types of Working Capital
• Needs of Working Capital
• Factors determining Working Capital
• Computation of Working Capital
• Sources of Working Capital
• Working Capital Management Policy
• Working Capital and Banking Committee

Meaning of Working Capital 
Capital of the concern may be divided into two major headings.

Fixed capital means that capital, which is used for long-term investment of the business concern. For example, purchase of permanent assets. Normally it consists of non-recurring in nature.

Working Capital is another part of the capital which is needed for meeting day to day requirement of the business concern. For example, payment to creditors, salary paid to workers, purchase of raw materials etc., normally it consists of recurring in nature. It can be easily converted into cash. Hence, it is also known as short-term capital.

Definitions
According to the definition of Mead, Baker and Malott,“Working Capital means Current Assets”.
According to the definition of J.S.Mill, “The sum of the current asset is the working capital of a business”.
According to the definition of Weston and Brigham, “Working Capital refers to a firm’s investment in short-term assets, cash, short-term securities, accounts receivables and inventories”
According to the definition of Bonneville, “Any acquisition of funds which increases the current assets, increase working capital also for they are one and the same”.
According to the definition of Shubin, “Working Capital is the amount of funds necessary to cover the cost of operating the enterprises”.
According to the definition of Genestenberg, “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, for example, from cash to inventories, inventories to receivables, receivables to cash”.

Concept of Working Capital
Working capital can be classified or understood with the help of the following two important concepts.

Gross Working Capital
Gross Working Capital is the general concept which determines the working capital concept. Thus, the gross working capital is the capital invested in total current assets of the business concern.
Gross Working Capital is simply called as the total current assets of the concern.

Net Working Capital
Net Working Capital is the specific concept, which, considers both current assets and current liability of the concern.
Net Working Capital is the excess of current assets over the current liability of the concern during a particular period.
If the current assets exceed the current liabilities it is said to be positive working capital; it is reverse, it is said to be Negative working capital.

Component of Working Capital
Working capital constitutes various current assets and current liabilities. This can be illustrated by the following chart.

Nature of Working Capital:
The nature of working capital is as discussed below:
i. It is used for purchase of raw materials, payment of wages and expenses.
ii. It changes form constantly to keep the wheels of business moving.
iii. Working capital enhances liquidity, solvency, creditworthiness and reputation of the enterprise.
iv. It generates the elements of cost namely: Materials, wages and expenses.
v. It enables the enterprise to avail the cash discount facilities offered by its suppliers.
vi. It helps improve the morale of business executives and their efficiency reaches at the highest climax.
vii. It facilitates expansion programmes of the enterprise and helps in maintaining operational effi­ciency of fixed assets.

Need for Working Capital:
Working capital plays a vital role in business. This capital remains blocked in raw materials, work in progress, finished products and with customers.
The needs for working capital are as given below:
i. Adequate working capital is needed to maintain a regular supply of raw materials, which in turn facilitates smoother running of production process.
ii. Working capital ensures the regular and timely payment of wages and salaries, thereby improving the morale and efficiency of employees.
iii. Working capital is needed for the efficient use of fixed assets.
iv. In order to enhance goodwill a healthy level of working capital is needed. It is necessary to build a good reputation and to make payments to creditors in time.
v. Working capital helps avoid the possibility of under-capitalization.
vi. It is needed to pick up stock of raw materials even during economic depression.
vii. Working capital is needed in order to pay fair rate of dividend and interest in time, which increases the confidence of the investors in the firm.

Importance of Working Capital:
It is said that working capital is the lifeblood of a business. Every business needs funds in order to run its day-to-day activities.
The importance of working capital can be better understood by the following:
i. It helps measure profitability of an enterprise. In its absence, there would be neither production nor profit.
ii. Without adequate working capital an entity cannot meet its short-term liabilities in time.
iii. A firm having a healthy working capital position can get loans easily from the market due to its high reputation or goodwill.
iv. Sufficient working capital helps maintain an uninterrupted flow of production by supplying raw materials and payment of wages.
v. Sound working capital helps maintain optimum level of investment in current assets.
vi. It enhances liquidity, solvency, credit worthiness and reputation of enterprise.
vii. It provides necessary funds to meet unforeseen contingencies and thus helps the enterprise run successfully during periods of crisis.