International Referred Research Journal, February, 2011. ISSN- 0974-2832 VoL.

II *ISSUE-25

Research PaperABST

ESSENTIALITY OFWORKING CAPITAL & ITS

MANAGEMENT INA BUSINESS CONCERN
* Dr. Neel Kamal Purohit

February, 2011

* Lecturer, Deptt. Of ABST, S.S. Jain Subodh P. G. College, Jaipur.

A B S T R A C T
In general words working capital is difference between total current assets & current liabilities. In order
to remain in market it is essential that an organization successfully manages their working capital. Working
capital can be seen as a metric for evaluating a company's paying capacity in short term. On other hand
high ratio of working capital shows its operating efficiency. All companies should therefore focus on the
tight management of working capital. Inventories, Accounts receivables and Accounts payables are of
specific importance since they can be influenced most directly by operational management.
Key words: Net Working Capital (NWC), Working Capital (WC), Liquidity, Quantum, Solvency.
Net working capital:
It has been said that net WC is a life blood of any required in order to maintain their operations.
business entity. In general words working capital is Working capital management:
difference between total current assets & current liabili- There are two components of WC, current assets and
ties. Current assets are assets which to be converted current liabilities. For ensuring that a company has
into cash in one financial year. Current assets include sufficient amount to meet its operating expenses &
Cash, Accounts receivables, Inventories, Prepaid ac- short term liabilities, management of the company should
counts which will be used within a year, and short term be focusing on maintaining standard level of these two
components. For managing the quantum of WC maninvestments.
Current liabilities are liabilities which are pay- agement of the organization should use some policies
able in cash within financial year. Current liabilities in- and techniques. So consequently they can manage the
cludes Creditors for goods and services, short term current assets and short term financing. An organizaloans, long term loans with maturity within one year. tion can manage it's WC position by identify the level
Working capital is one measure of liquidity. It's very of Inventory, identification of credit policy which will
important for Small Businesses to keep a close eye the attract to customers, identify the cash balance for meet
Working Capital required for the short-term running of day by day expenses and identify the appropriate source
the business. Creditors will be interested in a company's of short term financing. For managing the WC, manageworking capital as one indicator of debtor's ability to ment should be considered that, after how much time a
make payments on a timely basis. Most business activi- raw material purchased on credit will be converted into
ties affect working capital. If company earns profit on cash by selling it on cash or credit basis. The working
sale of goods, as they increase one current asset (Debt- capital cycle start from purchase of goods to sell it on
ors or Cash) more than they decrease another current cash or credit. After realization of cash from debtors it
is use to pay all credits i.e. payment to creditors, wages
assets (Inventory).
and other operating expenses.
Importance of adequate Working Capital:
Adequate working capital increases the productivity of Case study:
fixed assets. Adequate working capital increases con- Short term solvency of the company can be understood
fidence and efficiency of directors & managers. A Com- by compare the data of following two companies:
X Ltd.
Y Ltd.
pany can create a good credit policy due to adequate
Current
Assets
Rs.10000
Rs.6000
working capital. Adequate working capital increases
Rs.5000
Rs.6000
goodwill of a Company. Due to adequate working capi- Current Liabilities
Rs.5000
Rs.0
tal a Company can make prompt payment to its creditors Working Capital
Current
Ratio
2:1
1:1
& obtain benefit of cash discount. A Company can grab
benefits of favorable opportunities & can earn more As we can see in above case that X Ltd. has ample
profits. If there is no adequate Working Capital, a Com- margin of current assets over Current liabilities. X Ltd.has
pany will not be able to provide the goods or services ideal current ratio and a WC of Rs.5000/=. But in case

SH O D H

SA M IK S H A

A U R

M U L Y A N K A N

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International Referred Research Journal, February, 2011. ISSN- 0974-2832 VoL.II *ISSUE-25
of Y Ltd. There is nil working capital and no current
assets/ liabilities margin of safety. So it is clear that Y
Ltd. Has no WC with poor current ratio but X Ltd. has
a good quantum of WC with ideal current ratio. So, short
term solvency of X Ltd. better than Y Ltd.
Findings & Suggestions
As we have seen in this article that working capital is a
very important tool for operating business activities.
The working capital needs of each company will be a
little different. New companies should develop an idea
of what type of working capital requirement they will
need to operate by researching the cost and expenses

associated with their corporations engaged in similar

operations. When managing working capital, a company should attempt to pay bills at the last possible
moment and improve collections.
A company should also develop an inventory
system that does not result in large amounts of money
being tied up in unused inventory. It's very important
for Small Businesses to keep a close eye the Working
Capital required for the short-term running of the business. Ideas to manage Working Capital include improving terms with suppliers, giving less credit to customers, factoring invoices or getting an overdraft with bank.

R E F E R E N C E
Anthony, Robert N., and Others. Accounting: Text & cases. 9th ed. NP: McGraw -Hill Higher education, 1994. Diamond, Michael
A. Financial Accounting. 4th ed. Cincinnati: South Western publishing, 1995..Anderson, Hershal, and others. Financial Accounting
and Reporting. 4th ed. Medford, NJ: Malibu Publishing, 1995. M. R. Agarwal. Management Accounting:. Garima Publications, 2009

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