Unit 6-

Working Capital
Management
Meaning and definition
Working capital refers to short term funds to meet operating
expenses.

According to Ramamurthy, ”it refers to the funds which a

company must possess to finance its day-to-day operations”.
Types or kinds of working capital

1. Permanent working capital

Permanent working capital is the minimum investment kept in the form
of inventory of raw materials, work in progress, finished goods, stores
and spares and book debts to facilitate uninterrupted operation in a
business.

2. Temporary working capital

A firm is required to maintain additional current assets temporarily over
and above permanent working capital to satisfy cyclical demands.
Concept of working capital

1. Gross working capital

According to this concept, the total current assets are termed as the gross working capital.

2. Net working capital

The excess of current assets over current liabilities represents net working capital.
Determinants or factors influencing working capital
1. Nature of business
2. Size of business
3. Production cycle process
4. Production policy
5. Terms of purchase and sale
6. Business cycle
7. Growth and expansion
8. Scarce availability of raw materials
9. Profit level
10. Dividend policy
11. Operating efficiency
12. Availability of credit
13. Other factors
Sources of working capital

1.Permanent / fixed sources / short term sources

a.Shares
b.Debentures
c. Public deposits
d. Ploughing back of profits
e. Loans from financing institutions

2. Temporary / variable sources / long term sources

a. Indigenous bankers.
b. Trade credit 
c. Installment credit
d. Advances
e. Factoring / accounts receivable credit
f. Deferred incomes
g. Commercial papers
h. Commercial banks.
Adequate working capital

Reasons for maintaining adequate working capital.

• Adequate working capital can provide uninterrupted flow of production
• Sufficient working capital can help the business to pay all its liabilities and
operating expenses in time.
• The adequacy of working capital ensures a steady flow of raw materials to
production.
• It enables the company to purchase the trading goods in cash.
• An organization can make regular payment of salaries, wedges and other day to
day commitments only when it has sufficient working capital.
• It creates ability in the business to face emergencies.
• It can also attract more number of investors into its business by making a regular
payment of dividend. 
• It enables a business to withstand periods of depression smoothly.
Disadvantages of excess working capital

• Leads to low productivity even though sufficient cash is available.

• Outstanding liabilities and losses may be faced.
• Creates an imbalance between liquidity and profitability.
• It leads to Greater production level but not having a matching demand
in market.
• High level of inventories and its maintenance and storage cost
increases.
• Unwise dividend policies.
Demerits of inadequacy of working capital

• A firm is unable to take advantage of new opportunities to develop

new products.
• A firm will lose its reputation when it is not in a position to honor its
short term obligations.
• It becomes difficult for the firm to exploit favorable market situations.
• A company cannot avoid cash discount facilities in case of bulk order
• A company may have to borrow funds at higher rates of interest.
• A company will not be able to pay dividends in time.
• Nonpayment of wages, salaries etc in time demoralize its employees.