Working Capital Management^165Concept, Need & Determinants
Working capital could be defined as the portion of assets used in current operations.
The movement of funds from working capital to income and profits and back to working
capital is one of the most important characteristics of business. This cyclical operation
is concerned with utilisation of funds with the hope that they will return with an additional
amount called Income. If the operations of a company are to run smoothly, a proper
relationship between fixed capital and current capital has to be maintained.
Sufficient liquidity is important and must be achieved and maintained to provide the
funds to pay off obligations as they arise or mature. The adequacy of cash and other
current assets together with their efficient handling, virtually determine the survival or
demise of the company. A businessman should be able to judge the accurate requirement
of working capital and should be quick enough to raise the required funds to finance the
working capital needs.
Working capital is often classified as Gross Working Capital and Net Working Capital.
The former refers to the total of all Current Assets and the latter refers to the difference
between Current Assets and Current Liabilities.
The maintenance of a sound Working Capital position is an important function of the
Finance Department of the organisation. With the magnitude of business rising with
globalisation, the quantum of working capital to be managed is on the increase. No
wonder, working capital management is talked about more today than ever before.
Long-term investment decisions (capital budgeting) and long-term financing decisions
are characterized by the facts that they (a) generally involve large amounts of money,
and (b) are relatively infrequent occurrences. Decisions that come under the heading
ìshort-term financeî are equally important, because, while typical decisions often donít
involve as much money, decisions are much more frequent. This is suggested in the
results of a recent survey of CFOs.
Ranked Greatest Importance Average Time Allocated
Financial Planning 59% 35%
Working Capital Mgmt 27% 32%
Capital Budgeting 9% 19%
Long-Term Financing 5% 14%
Total100% 100%Chapter-7
Working Capital Management