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Working capital management

CHAPTER-1

INTRODUCTION

Working capital is one of the important aspects of financial management which is required to carry out the day to day operations of an organisation without any trouble. Working capital is very essential to maintain the smooth running of a business. All firms must have adequate amount of working capital as much as needed. It should be neither excessive nor inadequate. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations.

Success and failure of a business are largely depends on the working capital. Therefore it is considered as backbone of a business or firm. The main objective of the working capital management is to optimize the various variables in the working capital. Even a profitable business may fail if it does not have sufficient cash flow to meet its liability and expenses. Therefore, the working capital management ensures that the company has sufficient cash flow in order to meet its short term debt obligations and operating expenses.

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.e. They are Gross working capital and Net working capital.Working capital management There are two important concepts of working capital. Net Working Capital = Total Current Assets – Total Current Liabilities This project deals with the management of working capital of various steel companies. Page 2 . Gross working capital consists of all current assets and Net working capital includes excess of current assets over current liabilities. i.

Working capital management CHAPTER-2 WHAT IS WORKING CAPITAL Working capital is the amount of funds which is required to carry out the day to day operations of a business. Concepts of working capital: There are two important concepts of working capital. Negative working capital refers to a company which is currently unable to meet its short-term with its current assets such as cash. accounts receivable and inventory. They are:  Gross Working Capital  Net Working Capital Page 3 . Positive working capital means that the company is able to meet its short-term liabilities liabilities. Usually working capital comes from the followings given below: • Net income • • Long-term loans (non-current liabilities) Sale of capital (non-current) assets and • Funds contributed by the owners and investors.

e. i. Net Working Capital: Net working capital refers to excess of current assets over current liabilities. The working capital in certain companies may be further classified into the following types: Page 4 . work in progress and finished goods)  Current Liabilities: Current Liabilities includes creditors and bills payable. Net Working Capital = Total Current Assets – Total Current Liabilities  Current assets: Current assets consists • Cash and money market instruments... • Marketable securities.e. Gross Working Capital = Total value of current assets 2. • Receivables and • Inventories (raw materials. Gross Working Capital: Gross working capital includes all current assets i. • Debtors.Working capital management 1.

Initial working capital Initial working capital is a capital which is required at the time of the commencement of business. salaries and other sundry expenses. Regular working capital This type of working capital remains always in the enterprise for the successful operation. These are the promotion expenses incurred at the formation of the enterprise which also includes the incorporation fees such as Attorney's fees. It is used to raise the volume of production by improvement or extension of machinery.Working capital management 1. payment of wages. 3. Reserve margin working capital Page 5 . It may be used for purchasing raw material and supplies. Fluctuating working capital It is also known as variable working capital which helps to meet the seasonal requirements of the business. office expenses and other expenses. 4. 2.

earthquakes.Working capital management It refers to the amount utilized at the time of contingencies such as inflation. slump. strike. fire. Page 6 . flood. depression. lay off and unavoidable competition etc.