Meaning of Working Capital Management:
Working Capital consists of that portion of the assets of a business, which are used, in current operations. It includes receivables, inventories of raw materials, stores, work-in-progress and finished goods, merchandise, bill receivable, and cash. There are two concepts of working capital, Gross concept, and Net Concept. Gross working capital refers to total current assets. This concept is also known as the quantitative concept and the net concept refers to the difference between current assets and current liabilities. Working Capital can be positive or negative (positive is net working capital and negative is deficit working capital.)
Objectives of Working Capital Management
The aim of working capital management is to manage a firm’s current assets e.g. debtors, receivables, cash in hand, cash at bank, stock, etc., and the firm’s current liabilities viz. creditors, bills payable, etc. in the best possible manner. If it does not maintain it in a good manner, it is likely to become insolvent and may also become bankrupt. The current assets should be large enough to cover current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of concern while not keeping too high a level of any one of them so that the cost increases. Each of short term sources of finance must be continuously manageable to ensure that they are obtained and used in the best possible way. Proper management of working capital is very important for the success of a concern. “It aims at protecting the purchasing power of assets and maximizing the return on investment.”
The management of working capital also helps the management in evaluating various existing or proposed financial constraints and financial offerings. All these factors clearly indicate the importance of the working capital of an enterprise. It has been emphasized that a firm should maintain a sound working capital position and that there should be an optimum investment in working capital. Thus, there is a great need to manage working capital adequately. Small firms may not have much investment in fixed assets, but they have to invest in current assets such as cash, debtors, and inventories. Further, the role of current liabilities in financing current assets is far more significant in the case of small firms, as, unlike large firms, they face difficulties in raising long-term finances. There is a great relationship between sales and working capital needs. As sales grow, a firm needs to invest more in inventories and book debts. These needs become very frequent and fast when sales grow continuously. Continuous growth in sales may also require additional investment in fixed assets but they do not indicate the same urgency as displayed by current assets.
For Citing this Article use:
- Nirmal, C. (2016). Working capital management of selected pharmaceutical companies in India.
