Management of Working Capital

Q.1 What do you understand by working Capital?
Explain the concept and determinants of working capital.
Ans. Working capital is a fund needed to fulfill the operating cost of a concern. Each and every business concern should have adequate funds to meet its day-to-day expenses and to finance current asset viz., debtors, receivables and inventories. The funds tied up in current assets are known as working capital funds. The funds invested in these current assets keep revolving and are being constantly converted into cash and this cash in again converted into current assets.
Therefore, working capital is also known as circulating capital, ‘revolving capital,’ ‘short-term capital’, or liquid capital.
Concepts of working capital:- The working capital has following concepts:

1. Quantitative concept /caress working capital concept:- The gross working capital refers to the firm’s investment in current assets.
According to J.S. Milli, “The sum of current assets is the working capital of the business.”
From the management point of view, this concept is more appropriate as the management formulates all the plans on the basis of current assets and concentrates his attention on the quantum of current assets and their profitability. Thus, this is a quantitative aspect of working capital which emphasizes more on quantity than its qualities.
2. Qualitative or Net working capital concept: - The net working capital means the difference between current assets and current liabilities. If the amount of current liabilities. If the amount of current assets and current liabilities is equal, it means that there is no working capital.
The net working capital is a qualitative aspect of working capital and it measures the firm’s liquidity. It also indicates the extend to which working capital can be financed with ling term funds. This concept is useful only for accountants, investors, creditors or those persons who have interest in the liquidity and financial soundness of the firm.
3. Operating Cycle concept:- The amount of working capital required by a firm depends upon the length of production process and the expenses needed for this purpose The time required to complete the production process right from Purchas of raw material to the realization of sales in cash is called the operating cycle or working capital cycle.
This concept is more appropriate than the qualitative and quantitative approach because in this case the fund required for carrying on the operational activities is treated as working capital. It is also called circulating capital.




Determinants of Working capital :- The amount of working capital required depends upon a large number of factors and each factor has his own importance, They also wary from time to time in order to determine the proper amount of working capital of a firm, the following factors should be kept in mind :-
1. Nature of business
2. Size of business
3. Production process and policies
4. Changes in technologies
5. Requirement of cash
6. Availability of raw material
7. Length of operating Cycle

8. Seasonal Nature of Business
9. Firm’s Credit Policy
10. Terms of Purchase and Sales
11. Business Cycle fluctuations
12. Turnover of Invento
13. Banking relations
14. Rate of growth of business
15. Dividend policies
16. Working capital turnover
17. Taxation Policies
18. Price level changes



Q.2 Name the methods of estimating working capital requirements. Explain the
method of calculating working capital by operating cycle and forecasting method ?
Following methods are generally  used in estimating working capital:
(i) Operating Cycle Method
(ii) Net Current Assets Forecasting M
(iii) Projected Balance Sheet Method
(iv) Adjusted Profit and Loss Method