Working capital is the circulating capital that is needed for day to day activity of the business. According to the gross working capital concept, all the current assets are components of working capital. According to the net working capital concept, the difference between the total current assets and total current liabilities is the net working capital, if the value of total current assets is more than the value of total current liabilities, then the net working capital is positive. This excess amount of current assets has been financed from long-term sources. If the value of total current assets is less than the value of total current liabilities, then the net working capital is negative. In this situation, these excess amounts of current liabilities have been invested in fixed assets. If the value of total current assets is equal to the value of total current liabilities, then the net working capital is zero. In the operating cycle concept, the sum total of operating costs that are required to be incurred in order to perform an operating cycle is the working capital. Gross operating cycle equal to inventory holding period plus receivable collection period whereas net operating cycle equal to gross operating cycle minus accounts payable period.
Working capital can be classified into two categories according to its nature. The minimum amount of working capital that is to be maintained throughout the year for ensuring the effective use of fixed assets and the rotation process of the current assets is the permanent working capital whereas the portion of the working capital which is needed for meeting the seasonal demand and some special situational requirement is the variable working capital.
Working capital management is concerned with managing the different portions of current assets and current liabilities. Current assets refer to those assets which can be converted in the ordinary course of the business into cash within one accounting period, such as current investment, inventories, trade receivables, short-term loans and advances, cash at the bank, prepaid expenses, accrued income, etc. But in the case of debtors and inventories, they may remain outstanding or in store for the period of more than one year, yet they are considered as current assets. Current liabilities refer to those liabilities which have to be repaid generally within year by using the current assets or earning of the business. Trade payables, short-term provisions, short-term borrowings, etc. are the current liabilities.
For citing this article use:
- Rani, P. J. (2017). Impact of working capital management on the financial performance of some selected FMCG companies in India.