Working capital is the difference between current assets and current liabilities. Current assets include stocks of raw materials, work in progress and finished goods, debtors short-term investments and cash, whereas current liabilities include trade creditors, overdrafts and short-term loans. It represents the amount of day-to-day operating liquidity of the business. Positive working capital shows that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is not performing well in terms of its ability to meet its short-term liabilities with its current assets. The level of current assets is a key factor to determine the company’s liquidity position.
A company must generate enough cash to meet its short-term needs in order to be successful and working capital management is a key factor for achieving long-term success in a business. All decisions relating to working capital and short term financing are referred to as Working Capital Management. It involves control of stock, debtors, creditors and maintaining an optimum balance between short-term assets and liabilities. The decisions involved in Working capital management are short term decisions.
Objectives of working capital management:
The primary objective of working capital management is to ensure that sufficient cash is available to:
• Meet day-to-day cash flow needs.
• Minimize the risk of insolvency.
• Pay all the operational expenses when they fall due.
• Pay creditors to ensure continued supplies of goods and services.
• Pay government taxation and providers of capital dividends.
• Ensure the long-term survival of the business entity.
• Increase the profitability of the company.
Importance of worki ...