Working capital is also called revolving, circulating or short term capital. Every business require the funds for its establishment which is called fixed capital and require funds to carry out its day to day operations like purchase of raw material, payment of wages etc. which is called working capital. Thus, working capital is the capital required to finance the short term or current assets such as cash, securities, debtors, stock. It refers to current assets – current liabilities. The aim of working capital management is to manage the current assets and current liabilities of the firm in a satisfactory manner. The working capital should neither be excessive nor be inadequate. As the working capital management policies has effect upon the liquidity, profitability and health of the organization. It has three dimensions.
Dimension I: It is concerned with formulation of policies relating to risk, profitability and liquidity.
Dimension II: It is concerned with the decision about the composition and level of current assets.
Dimension III: It is concerned with the decision about the composition and level of current liabilities.
FAQs
Every component of working capital (namely inventory, receivables and payables) has two dimensions TIME and MONEY, in managing working capital.
What are the dimensions of working capital? ›
Dimension I: It is concerned with formulation of policies relating to risk, profitability and liquidity. Dimension II: It is concerned with the decision about the composition and level of current assets. Dimension III: It is concerned with the decision about the composition and level of current liabilities.
What are the 4 main components of working capital management and explain? ›
A well-run firm manages its short-term debt and current and future operational expenses through its management of working capital, the components of which are inventories, accounts receivable, accounts payable, and cash.
What are the pillars of working capital management? ›
The Three Pillars of Working Capital Optimization—Receivables, Payables, and Inventory management—lay the foundation for improved financial performance, risk reduction, and sustainable growth.
What are the main concepts of working capital? ›
There are two concepts of working capital viz . quantitative and qualitative. Some people also define the two concepts as gross concept and net concept. According to quantitative concept, the amount of working capital refers to 'total of current assets'.
What is the core of working capital management? ›
Working capital management aims at more efficient use of a company's resources by monitoring and optimizing the use of current assets and liabilities. The goal is to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations while maximizing its profitability.
What are the major determinants of working capital management? ›
Answer: The several factors affecting working capital management include the length of the operating cycle, the scale of operation, nature of business, business cycle fluctuations, seasonal factors, technology and production cycle, the credit allowed, credit availability, operating efficiency, level of competition, ...
What are the main objectives of working capital management? ›
The main objectives of working capital management include maintaining the working capital operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the working capital, and maximizing the return on current asset investments.
How to measure working capital management? ›
Working capital = current assets – current liabilities. Net working capital = current assets (minus cash) - current liabilities (minus debt). Operating working capital = current assets – non-operating current assets. Non-cash working capital = (current assets – cash) – current liabilities.
What are the three approaches to working capital management? ›
It's important to keep the finances balanced and cover expected and unexpected expenditures. There are three major approaches of working capital management. They are aggressive, moderate or hedging, and conservative.
Working capital management involves balancing movements related to five main items – cash, trade receivables, trade payables, short-term financing, and inventory – to make sure a business possesses adequate resources to operate efficiently.
What are the 4 elements of working capital management? ›
By understanding the components of working capital—cash and cash equivalents, accounts receivable, inventory, and accounts payable—companies can make informed decisions to optimize their working capital management.
What is an example of good working capital management? ›
What is an example of working capital management? An example of working capital management is computing the Accounts Receivable Turnover Ratio and then computing the day's sales in receivables. Another example is analyzing the change in the working capital ratio from one year to the next.
What is the theory of working capital management? ›
The theory of working capital management contends that if working capital is managed according to prescriptive theory then it would be expected that businesses would invest in working capital, finance working capital, monitor factors that influence working capital, manage cash, accounts receivable, inventory, accounts ...
What are the dimensions of capital? ›
In this study, social capital is measured in three dimensions: structure capital, relational capital, and cognitive. ... ...
What is working capital made up of? ›
Working capital, also known as net working capital (NWC), is the difference between a company's current assets—like cash, accounts receivable/customers' unpaid bills, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts.
What is ideal working capital ratio? ›
Most analysts consider the ideal working capital ratio to be between 1.5 and 2.
