Page 250 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 10: Working Capital Management

10.8 Keywords Notes

Gross Working Capital: The total current assets are termed as the gross working capital.
Net Working Capital: The excess of current assets over current liabilities represents net working
capital.

Permanent Working Capital: It is the minimum investment kept in the form of inventory of raw
materials, work in progress, finished goods, stores and spares, and book debts to facilitate
uninterrupted operation in a firm.
Temporary Working Capital: Any additional working capital apart from permanent working
capital required to support the changing production and sales activities is referred to as temporary
working capital.
Working Capital: It refers to short-term funds to meet operating expenses.

10.9 Review Questions

1. Why do we distinguish between permanent and variable working capital?
2. Why is the volume of sales the most important factor affecting working capital? Besides
sales, what other factors affect working capital? Why?
3. What two processes are accomplished in the management of working capital?
4. Why should the manager know the percentage of funds in current accounts?
5. What are the two kinds of fluctuations in working capital levels? How should they be
viewed?
6. What technique is used for identifying relationship between working capital levels and
other variables such as sales level? What does this technique do?
7. At least three sets of guidelines for the sources of working capital are available. How are
the three similar? How are they different?
8. Expenses reduce working capital, whereas charging of depreciation does not”. Do you
agree?
9. Can a company show a net loss in its profit and loss account and an increase in the working
capital?

Answers: Self Assessment

1. gross 2. indirect

3. under-capitalized 4. Over-capitalization
5. liquidity 6. less
7. operating cycle 8. Shorter
9. conservative 10. safety
11. Trade credit 12. Cash credit

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