meaning and importance of working capital managment – MODDING ZONE

meaning and importance of working capital managment

Meaning and Importance of Work-
Meaning of Management of Working Capital.

Working capital means current assets such as cash, accounts receivables and inventory etc. minus the current liabilities(Networking capital concept). The management of current assets is as important as or rather more important than the management of fixed assets because the fate most of the businesses’ very largely depends upon the manner in which their working capital is managed. The problem of working capital management involves the problem of decision making regarding investment in various current assets with an objective of maintaining the liquidity of funds of the firm to meet its obligations promptly and efficiently.

The management of working capital encompasses the following problems:

1. To decide upon the optimal level of investment in various current assets i.e., determining the size of working capital

2. To decide upon the optimal mix of short-term funds in relation to long term capital, and

3. To locate the appropriate means of short-term financing.

The study of working capital management is incomplete unless we have an over-all look on the management of current liabilities. Determining the appropriate levels of current assets and current liabilities of level of working capital involves fundamental decisions regarding firm’s liquidity and the composition of firm’s debts.

Important Objectives of Working Capital Manage-
ment. There are twofold objectives of the management of working capital.

1.Maintenance of working capital at appropriate level,

2.Availability of ample funds as and when they are

In the accomplishment of these two objectives, the management has to consider the composition of current asSets pool. The working capital position sets the various purchasing, financing expansion and dividend etc.

Importance of Working Capital Management- The
importance of the management of working capital can be judged from the following facts-

1. There is a positive correlation between the sale of the product of the firm and the current assets – An increase in the sale of the product requires a corresponding increase in current assets. It is, therefore, indispensable to manage the current assets properly and efficiently.

2. More than half of the total capital of the firm is
generally invested, in current assets – It means less than half of the capital is blocked in fixed assets. We pay due attention to the management of fixed assets through the capital budgeting process. Management of working capital too, therefore, attracts the attention of the management.

3. In emergency (Non-availability of funds etc.) fixed assets can be acquired on lease but there is no alternative for current assets. Investment in current assets i.e., inventory or receivables, can in no way be avoided without sustaining loss.

4. Working capital needs are more often financed
through outside sources, so it is necessary to utilize them in the best way possible.

5. The management of working capital is more important for small units because they scarcely rely on long-term,capital market and have easy access to short-term financial sources i.e., trade credit, short-term bank loan etc.

6. In the modern system approach to management,the operations of the firm are viewed as a total that is integrated system. In this sense, it is not possible to study one segment of the firm individually or left in out completely.Hence, an overall look on the management of working capital is necessary.

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