Chapter V Working Capital Management
B. Com III Sem. VI
Dr. Prakash R. Rodiya, Asst. Prof. Dept. of Commerce
Introduction:
Working capital can be understood as a measure of both a company’s competence and its short
term financial healthiness. For a layman, it purely means the distinction among the current assets
and current liabilities. It is the firm’s property of current, or short-term, assets. Working capital is
normally alienated in two types, viz. gross working capital and net working capital. Gross
Working Capital is nothing but the sum of current or circulating resources. Net working capital,
means current assets minus current liabilities which provide an exact appraisal of the liquidity
situation of firm with the liquidity-profitability dilemma solidly validated in the financial plan of
obligations which mature within a twelve-month duration. As we have seen, the two main parts
of the working capital are assets and liabilities. First, short-term, or current liabilities comprise
the section of funds which have been intended for and raised. Since administrations have to be
concerned with correct financial arrangement, these and other funds must be raised sensibly.
Short-term or current assets comprise a part of the asset investment conclusion and necessitate
meticulous appraisal by the firm’s executives. Further, since there exists a close association
between sales fluctuations and invested amounts in current assets, a watchful preservation of the
appropriate asset and funds should be ensured.
Concept of Working capital:
Working capital naturally means the firm’s property of current, or short-term, assets such as
cash, receivables, stock, and saleable securities. Working capital refers to that fraction of firm’s
capital which is requisite for financing short-term or current assets such as cash, saleable
securities, debtors, and stocks. In the other words working capital means the sum of funds
essential to wrap the cost of operating the venture. Working capital means the resources (i.e.;
capital) obtainable and used for day-to-day workings of a venture. It consists generally the
segment of assets of a company which are used in or connected to its current operations. It refers
to resources which are used during the bookkeeping period to produce a current income of a type
which is consistent with main reason of a firm survival. Working Capital is the capital used to
,make goods and attract sales. The less Working Capital used to attract sales; the superior is likely
to be the return on investment. Working Capital management is about the marketable and
financial aspects of stock, credit, purchasing, marketing, and royalty and investment strategy.
The superior the profit boundary, the lower is probable to be the level of Working Capital tied up
in creating and selling titles. The quicker that we create and sell the books the higher is likely to
be the return on investment.
There are two probable interpretations of working capital concept:
l. Balance Sheet Concept
2. Operating Cycle Concept
It goes without saying that the outline of management will be very mainly influenced by the
approach taken in defining it. Therefore, the two concepts are discussed alone in a nutshell.
1. Quantitative conception:
The gross working capital refers to the organization’s investment in current assets.
In the words of J.S. Milli, “The sum of current assets is the working capital of the business.”
From the management point of sight, this concept is more appropriate as the management
formulates all the strategies on the basis of current assets and concentrates his awareness on the
quantum of current assets and their prosperity. Thus, this is a quantitative feature of working
capital which emphasizes more on number than its character.
2. Qualitative concept:
The net working capital means the distinction between current assets and current liabilities. If
the sum of current assets and current liabilities is equivalent, it means that there is no working
capital. The net working capital is a qualitative portion of working capital and it measures the
organizations liquidity. It also indicates the extent to which working capital can be financed with
long term resources. This concept is helpful only for accountants, investors, creditors and
interested persons in the liquidity and financial reliability of the organization.
3. Operating cycle concept:
The amount of working capital requisite by a firm depends upon the extent of manufacture
process and the operating cost needed for this reason. The time mandatory to complete the
production procedure right from Purchase of raw material to the grasp of sales in cash is known
as the operating cycle or working capital cycle.
, This concept is more suitable than the qualitative and quantitative aspect since in this case the
fund necessary for carrying on the operational actions is treated as working capital. It is also
called circulating capital.
1. H.G, Guttmann:
“Working Capital is the surplus of current assets over current liabilities.”
2. Hoglend. J. Bierman, and A. K. Mc Adams:
“Working Capital is descriptive of that capital which is not fixed. But the more common
use of the working Capital is to consider it as the distinction between the book value of
the current assets and current liabilities.”
3. Brown and Housard:
“Working Capital represents the overload of current assets over current liabilities”
4. Weston the Brigham:
“Working Capital to a firm’s investment in short term assets cash short term securities,
accounts, receivables and inventories.”
5. Meal Baker Malott and Field:
“Working Capital represents merely the current capital assets.”
6. J.S. Mill:
“Working Capital means a sum of current assets”
7. Prof. C.W. Gerstoberg:
“A Working Capital shortfall exits if current liabilities exceed current assets.”
8. Lincoln:
“Working Capital equals the aggregate value of current assets minus aggregate value of
current liabilities”
9. Prof. S.C. Kuchhal
“Gross Working Capital may be used to refer to total current assets and net working
capital refers to the excess of current assets over current liabilities”
Balance Sheet Concept
There are two interpretation of working capital under the balance sheet concept. It is represented
by the surplus of current assets over current liabilities and it is the amount generally obtainable to
finance current operations. But, occasionally working capital is also used as a synonym for gross
B. Com III Sem. VI
Dr. Prakash R. Rodiya, Asst. Prof. Dept. of Commerce
Introduction:
Working capital can be understood as a measure of both a company’s competence and its short
term financial healthiness. For a layman, it purely means the distinction among the current assets
and current liabilities. It is the firm’s property of current, or short-term, assets. Working capital is
normally alienated in two types, viz. gross working capital and net working capital. Gross
Working Capital is nothing but the sum of current or circulating resources. Net working capital,
means current assets minus current liabilities which provide an exact appraisal of the liquidity
situation of firm with the liquidity-profitability dilemma solidly validated in the financial plan of
obligations which mature within a twelve-month duration. As we have seen, the two main parts
of the working capital are assets and liabilities. First, short-term, or current liabilities comprise
the section of funds which have been intended for and raised. Since administrations have to be
concerned with correct financial arrangement, these and other funds must be raised sensibly.
Short-term or current assets comprise a part of the asset investment conclusion and necessitate
meticulous appraisal by the firm’s executives. Further, since there exists a close association
between sales fluctuations and invested amounts in current assets, a watchful preservation of the
appropriate asset and funds should be ensured.
Concept of Working capital:
Working capital naturally means the firm’s property of current, or short-term, assets such as
cash, receivables, stock, and saleable securities. Working capital refers to that fraction of firm’s
capital which is requisite for financing short-term or current assets such as cash, saleable
securities, debtors, and stocks. In the other words working capital means the sum of funds
essential to wrap the cost of operating the venture. Working capital means the resources (i.e.;
capital) obtainable and used for day-to-day workings of a venture. It consists generally the
segment of assets of a company which are used in or connected to its current operations. It refers
to resources which are used during the bookkeeping period to produce a current income of a type
which is consistent with main reason of a firm survival. Working Capital is the capital used to
,make goods and attract sales. The less Working Capital used to attract sales; the superior is likely
to be the return on investment. Working Capital management is about the marketable and
financial aspects of stock, credit, purchasing, marketing, and royalty and investment strategy.
The superior the profit boundary, the lower is probable to be the level of Working Capital tied up
in creating and selling titles. The quicker that we create and sell the books the higher is likely to
be the return on investment.
There are two probable interpretations of working capital concept:
l. Balance Sheet Concept
2. Operating Cycle Concept
It goes without saying that the outline of management will be very mainly influenced by the
approach taken in defining it. Therefore, the two concepts are discussed alone in a nutshell.
1. Quantitative conception:
The gross working capital refers to the organization’s investment in current assets.
In the words of J.S. Milli, “The sum of current assets is the working capital of the business.”
From the management point of sight, this concept is more appropriate as the management
formulates all the strategies on the basis of current assets and concentrates his awareness on the
quantum of current assets and their prosperity. Thus, this is a quantitative feature of working
capital which emphasizes more on number than its character.
2. Qualitative concept:
The net working capital means the distinction between current assets and current liabilities. If
the sum of current assets and current liabilities is equivalent, it means that there is no working
capital. The net working capital is a qualitative portion of working capital and it measures the
organizations liquidity. It also indicates the extent to which working capital can be financed with
long term resources. This concept is helpful only for accountants, investors, creditors and
interested persons in the liquidity and financial reliability of the organization.
3. Operating cycle concept:
The amount of working capital requisite by a firm depends upon the extent of manufacture
process and the operating cost needed for this reason. The time mandatory to complete the
production procedure right from Purchase of raw material to the grasp of sales in cash is known
as the operating cycle or working capital cycle.
, This concept is more suitable than the qualitative and quantitative aspect since in this case the
fund necessary for carrying on the operational actions is treated as working capital. It is also
called circulating capital.
1. H.G, Guttmann:
“Working Capital is the surplus of current assets over current liabilities.”
2. Hoglend. J. Bierman, and A. K. Mc Adams:
“Working Capital is descriptive of that capital which is not fixed. But the more common
use of the working Capital is to consider it as the distinction between the book value of
the current assets and current liabilities.”
3. Brown and Housard:
“Working Capital represents the overload of current assets over current liabilities”
4. Weston the Brigham:
“Working Capital to a firm’s investment in short term assets cash short term securities,
accounts, receivables and inventories.”
5. Meal Baker Malott and Field:
“Working Capital represents merely the current capital assets.”
6. J.S. Mill:
“Working Capital means a sum of current assets”
7. Prof. C.W. Gerstoberg:
“A Working Capital shortfall exits if current liabilities exceed current assets.”
8. Lincoln:
“Working Capital equals the aggregate value of current assets minus aggregate value of
current liabilities”
9. Prof. S.C. Kuchhal
“Gross Working Capital may be used to refer to total current assets and net working
capital refers to the excess of current assets over current liabilities”
Balance Sheet Concept
There are two interpretation of working capital under the balance sheet concept. It is represented
by the surplus of current assets over current liabilities and it is the amount generally obtainable to
finance current operations. But, occasionally working capital is also used as a synonym for gross
