Page 6 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Dilfraz Singh, Lovely Professional University
Unit 1: Introduction to Working Capital Management

Unit 1: Introduction to Working Capital Management Notes

CONTENTS
Objectives
Introduction

1.1 Concept of Working Capital
1.1.1 Balance Sheet Concept
1.1.2 Operating Cycle Concept

1.2 Importance of Working Capital
1.3 Factors Affecting Working Capital Requirements
1.4 Levels of Working Capital Investment
1.5 Optimal Level of Working Capital Investment
1.6 Overall Working Capital Policy

1.7 Summary
1.8 Keywords
1.9 Review Questions

1.10 Further Readings
Objectives

After studying this unit, you will be able to:
Know the concept of working capital

Discuss the importance of working capital
Identify the factors affecting working capital requirements
Explain the levels of working capital investment
Describe the overall working capital policy

Introduction

Working capital can be understood as a measure of both a company’s efficiency and its short-
term financial health. For a layman, it simply means the difference between the current assets
and current liabilities. It is the firm’s holdings of current, or short-term, assets (such as cash).

Working capital is generally divided in two types, viz. gross working capital and net working
capital. Gross Working Capital (GWC) is nothing but the total current or circulating assets. Net
working capital, NWC (current assets minus current liabilities), provides an accurate assessment
of the liquidity position of firm with the liquidity-profitability dilemma solidly authenticated
in the financial scheme of obligations which mature within a twelve-month period.
As we have seen, the two main components of the working capital are assets and liabilities.
First, short-term, or current liabilities constitute the portion of funds which have been planned
for and raised. Since management must be concerned with proper financial structure, these and

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