S H O D H S A M I K 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
Research PaperABST
February, 2011
Net working capital:
It has been said that net WC is a life blood of any
business entity. In general words working capital is
difference between total current assets & current liabili-
ties. Current assets are assets which to be converted
into cash in one financial year. Current assets include
Cash, Accounts receivables, Inventories, Prepaid ac-
counts which will be used within a year, and short term
investments.
Current liabilities are liabilities which are pay-
able in cash within financial year. Current liabilities in-
cludes Creditors for goods and services, short term
loans, long term loans with maturity within one year.
Working capital is one measure of liquidity. It's very
important for Small Businesses to keep a close eye the
Working Capital required for the short-term running of
thebusiness. Creditors will be interested in a company's
working capital as one indicator of debtor's ability to
make payments on a timely basis. Most business activi-
ties affect working capital. If company earns profit on
sale of goods, as they increase one current asset (Debt-
ors or Cash) more than they decrease another current
assets (Inventory).
Importance of adequate Working Capital:
Adequate working capital increases the productivity of
fixed assets. Adequate working capital increases con-
fidence and efficiency of directors & managers. A Com-
pany can create a good credit policy due to adequate
working capital. Adequate working capital increases
goodwill of a Company. Due to adequate working capi-
tal a Company can make prompt payment to its creditors
& obtain benefit of cash discount. A Company can grab
benefits of favorable opportunities & can earn more
profits. If there is no adequate Working Capital, a Com-
pany will not be able to provide the goods or services
ESSENTIALITY OFWORKING CAPITAL & ITS
MANAGEMENT INA BUSINESS CONCERN
* Dr. Neel Kamal Purohit
* 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.
required in order to maintain their operations.
Working capital management:
There are two components of WC, current assets and
current liabilities. For ensuring that a company has
sufficient amount to meet its operating expenses &
short term liabilities, management of the company should
be focusing on maintaining standard level of these two
components. For managing the quantum of WC man-
agement of the organization should use some policies
and techniques. So consequently they can manage the
current assets and short term financing. An organiza-
tion can manage it's WC position by identify the level
of Inventory, identification of credit policy which will
attract to customers, identify the cash balance for meet
day by day expenses and identify the appropriate source
of short term financing. For managing the WC, manage-
ment should be considered that, after how much time a
raw material purchased on credit will be converted into
cash by selling it on cash or credit basis. The working
capital cycle start from purchase of goods to sell it on
cash or credit. After realization of cash from debtors it
is use to pay all credits i.e. payment to creditors, wages
and other operating expenses.
Case study:
Short term solvency of the company can be understood
by compare the data of following two companies:
X Ltd. Y Ltd.
Current Assets Rs.10000 Rs.6000
Current Liabilities Rs.5000 Rs.6000
Working Capital Rs.5000 Rs.0
Current Ratio 2:1 1:1
As we can see in above case that X Ltd. has ample
margin of current assets over Current liabilities. X Ltd.has
ideal current ratio and a WC of Rs.5000/=. But in case
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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 com-
pany 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 busi-
ness. Ideas to manage Working Capital include improv-
ing terms with suppliers, giving less credit to custom-
ers, factoring invoices or getting an overdraft with bank.
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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