Working Capital Management
Meaning of Working Capital
The process of managing activities and processes related to working capital. This level of management serves as a check and balances system to ensure that the amount of cash flowing into the business is enough to sustain the company's operations. This is an ongoing process that must be evaluated using the current level of assets and liabilities. Working capital management may involve implementing short-term decisions that may or may not carry over from one earnings period to the next.
Definition of Working Capital
‧According to the definition of Mead, Baker and Malott, “Working Capital means Current Assets”.
‧According to the definition of J.S.Mill, “The sum of the current asset is the working capital of a business”.
‧Working capital management (WCM) is defined as the management of short-term liabilities and short-term assets. The process is used continuously to operate and generate cash flow to meet the need for short- term obligations and daily operational expenses.
Objective of Working Capital
‧ For the purchase of raw materials, components and spares.
‧ To pay wages and salaries.
‧ To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc.
‧ To provide credit facilities to customers etc.
Nature of Working Capital Management
‧It is used for purchase of raw materials, payment of wages and expenses.
‧It changes form constantly to keep the wheels of business moving.
‧Working capital enhances liquidity, solvency, creditworthiness and reputation of the enterprise.
‧It generates the elements of cost namely: Materials, wages and expenses.
‧It enables the enterprise to avail the cash discount facilities offered by its suppliers.
‧It helps improve the morale of business executives and their efficiency reaches at the highest climax.
‧It facilitates expansion programs of the enterprise and helps in maintaining operational efficiency of fixed assets.
Importance of Working Capital
‧It helps measure profitability of an enterprise. In its absence, there would be neither production nor profit.
‧Without adequate working capital an entity cannot meet its short-term liabilities in time.
‧A firm having a healthy working capital position can get loans easily from the market due to its high reputation or goodwill.
‧Sufficient working capital helps maintain an uninterrupted flow of production by supplying raw materials and payment of wages.
‧Sound working capital helps maintain optimum level of investment in current assets.
‧It enhances liquidity, solvency, credit worthiness and reputation of enterprise.
‧It provides necessary funds to meet unforeseen contingencies and thus helps the enterprise run successfully during periods of crisis.
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