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Anoop Mohanty, Lovely Professional University                          Unit 8: Working Capital Management




                        Unit 8: Working Capital Management                                      Notes


             CONTENTS

             Objectives
             Introduction

             8.1   Concept and Significance of Working Capital
                 8.1.1   Gross Working Capital Concept
                 8.1.2   Net Working Capital Concept

             8.2   Operating Cycle and Cash Cycle
             8.3   Factors Affecting Working Capital Management
             8.4   Estimation of Working Capital
             8.5   Sources of Working Capital

             8.6  Summary
             8.7  Keywords
             8.8  Self Assessment
             8.9  Review Questions
             8.10   Further Readings

          Objectives


          After studying this unit, you will be able to:

               Discuss concept and significance of working capital
               Explain determining working capital requirements

          Introduction


          Working capital management is signifi cant in financial management due to the fact that it plays a
          vital role in keeping the wheel of the business running. Every business requires capital, without
          which it cannot be promoted. Investment decision is concerned with investment in current assets


          and fixed assets. There are two assets required to be fi nanced by fixed capital and working capital.
          In other words, the required capital can be divided into two categories, such as fixed capital and

          working capital. Fixed capital required for establishment of a business, where as working capital
          required to utilize fixed assets. Fixed assets cannot be utilized without current assets. It is just like

          a blood in the human body, without which there is no body.

          8.1 Concept and Significance of Working Capital
          Working capital refers to short-term funds to meet operating expenses. It refers to the funds,
          which a company must possess to finance its day-to-day operations. It is concerned with the


          management of the firm’s current assets and current liabilities. It relates with the problems that

          arise in attempting to manage the current assets, current liabilities and their inter-relationship
          that exists between them. If a firm cannot maintain a satisfactory level of working capital, it is

          likely to become insolvent and may even be forced into bankruptcy.



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