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Unit 10: Working Capital Management

Working capital management is the functional area of finance that covers all the current accounts Notes
of the firm. It is concurred with management of the level of the individual current assets as well
as management of total working capital.
10.1 Meaning and Concept of Working Capital

Working capital refers to the funds invested in current assets, i.e., investment in sundry debtors,
cash and other current assets. Current assets are essential to utilize facilities provided by plant
and machinery, land and buildings. In case of the manufacturing organization, a machine cannot
be used without raw material. The investment in the purchase of raw materials is identified as
working capital. It is obvious that a certain amount of funds are tied up in raw material inventories,
work in progress, finished goods, consumable stores, sundry debtors and day-to-day cash
requirements. However, the organization also enjoys credit facilities from its suppliers by way
of credit. Similarly, the organization need not pay immediately for various expenses, etc. the
workers are paid only periodically. Therefore, a certain amount of funds automatically become
available to finance the current assets requirement. However, the requirement of current assets
is usually greater than the amount of funds provided through current liabilities. The goal of
working capital management is to manage the firm’s current assets and current liabilities in
such a way that a satisfactory level of working capital is maintained.
From the point of view of concept the term, working capital, can be used in two different ways:
1. Gross working capital: The gross working capital refers to investment in all the current assets
taken together. The total of investments in all current assets is known as gross working capital.
2. Net working capital: Net working capital refers to the excess of total current assets over total
current liabilities. Current liabilities are those liabilities that are intended to be paid in the
ordinary course of business within a year, out of the current assets or earnings of the concern .
From the point of view of time, the term working capital can be divided into two categories:

1. Permanent: It is also referred as hard core working capital. It is the minimum level of
investment in the current assets that is carried by the business at all times to carry out
maximum level of its activities. It should be financed by long-term sources.
2. Temporary working capital: It refers to that part of working capital, which is required by
the business over and above permanent working capital. It is also called variable working
capital. Since the quantum of temporary working capital keeps on fluctuating from time-
to-time depending on the business activities, at may be financed from short-term sources.

The following figure shows permanent and temporary or fluctuating or variable working capital:
Figure 10.1: Permanent and temporary Working capital

Fluctuating or temporary
Fluctuating or temporary

Permanent
Permanent

X axis -Time
Y axis- Amount of Working Capital- Permanent and Temporary or fluctuating

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