Working capital Unit 6

Meaning:
Working capital is that part of capital, which is invested in current or circulating assets. It is
capital locked up in various current assets such as stock of raw materials, work in progress, stock
of finished goods, debtors and cash and bank balances prepaid expenses, outstanding incomes. It
is capital invested in working assets. It is the amount of capital required to carry on day to day
operations of the business.

Types

Concepts

Determinants

Sources

Adequate working capital:

An amount of working capital which is neither excessive than their requirement nor insufficient to
carry on their day to day operations is called as adequate working capital.

Advantages of adequate working capital:

1. It helps in getting easy financial assistance from banks and financial institutions.
2. It helps to improve goodwill of the business organization.
3. It helps in smooth and uninterrupted flow of business operations.
4. It helps to maintain good customer and supplier relationships.
5. It helps to take advantage of favorable market conditions.
6. It gives business organization the strength to face the crisis effectively.
7. Through smooth and uninterrupted flow of business operations, it improves the solvency
of business organizations.
8. It improves the morale, efficiency, productivity of employess and reduces the waste and
absenteeism of employees.

In adequate working capital

Inadequate working capital means shortage of working capital to meet the day to day operating
activities of the business concern. In other words the quantum of inadequate working capital is
the difference between actual working capital and adequate working capital.

Archana S, Dept of Commerce & Management Page 1

Working capital Unit 6

Problems of inadequate working capital-

1. With inadequate working capital business organization loose the advantages of favorable
market conditions
2. It leads to under utilization of plant capacity
3. Difficult to complete the business operations as per schedule
4. Difficult to meet the customers demand in time
5. Chances of loosing market are more
6. It badly affects the image of the business organization
7. It adversely affects the liquidity and solvency of the business organization
8. Due to inadequate working capital a business organization fails to pay the wages in time,
which in turn affects the employees moral, efficiency and productivity
9. It affects the profitability of the business organization and pulls towards huge loss
10. It affects the goodwill of the firm
11. The average rate of return cannot be earned by the company
12. Fixed assets cannot be used properly due o inadequate working capital.

Working capital management

Working capital management refers to management of current assets and current liabilities.
Working capital management is a managerial strategy of maintaining efficient levels of
components of working capital current assets & current liabilities.

It is concerned with maintaining adequate amount of working capital which is neither excessive
nor adequate.

The term current assets refer to those assets which in the ordinary course of business, turns in to
cash. The major component of current assets is cash, bills receivable, debtors and inventory.
Current liabilities are bills payable, bank overdraft and outstanding expenses.

Archana S, Dept of Commerce & Management Page 2