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Working Capital Management

The two major concept of working capital are Net Working Capital and Gross
Working Capital. When accountant use the term working capital, they generally
are referring to Net Working Capital that is the dollar difference between the
current asset and current liabilities.

Net Working Capital: Net Working Capital, is defined as Current Assets


minus Current Liabilities. Current assets include stocks, debtors, cash &
equivalents and other current assets. Current liabilities include all the short-term
borrowings.

Gross working capital: The firm's investment in current assets (such as cash
and marketable securities, receivables, and inventory).

Working capital management: A managerial accounting strategy focusing on


maintaining efficient levels of both components of working capital, current assets
and current liabilities, in respect to each other. Working capital management
ensures a company has sufficient cash flow in order to meet its short-term debt
obligations and operating expenses.

Classification of Working Capital on the Basis of Time

Permanent Working Capital: The amount of current assets required to meet a


firm’s long term minimum needs is known as permanent working capital.

Temporary Working Capital: The amount of current assets that varies with
seasonal (changing according to the situation) requirements.

Significance of Working Capital Management

Working capital management is important for many reasons which are as follow:
1. Working capital management effects the company risk return and share
price.
2. Working Capital Management shows the optimal level of investment in
current assets.
3. The management protects the firm from liquidity problems by continuously
managing a net difference between the current asset and current
liabilities.

Advantages of working capital management:


1. It helps the business concern in maintaining the good will.
2. It can arrange loans from banks and others on easy and favorable terms.
3. It enables a concern to face business crisis in emergencies such as
depression.
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4. It creates an environment of security, confidence and over all efficiency in


a business.

Disadvantages:
1. Rate of return on investment also fall with the shortage of working
capital.
2. Excess working capital may result into over all inefficiency in
organization.
3. Inadequate working capital can not pay its short term liabilities in time.

Mansoor & Co Working Capital

Mansoor & Co is an example of a small business which has the current assets as
follows:
Cash…………………… ...Rs.30, 000 A/P………………….Rs.150,000
A/R……………………. ...Rs.15, 000 S/P ...........................Rs.20, 000
Inventories ……………..Rs.200, 000

Total Current Assets……Rs.245, 000 Total current liabilities…Rs.170, 000/-

Hence,
Net Working Capital = Current assets – Current Liability
Net Working Capital = 245,000 – 170,000
Net Working Capital = Rs.75, 000/-
As we know that a small business having no access of large financial
intermediaries to get loan, except mortgages on the building therefore Mansoor
(owner of Mansoor & Co) defend on creditor agreement (from whom he bought
inventory).but the current liability is a donated fund need no compensation for the
money. So Mansoor is not paying any interest on the money. This gives
advantage to Mansoor. But he will pay the loan in a few months. If the creditor
asks for his money, there will be a difficult situation for the owner. For this
purpose he will make plan to handle the situation.

Recommendation:
I will give an opinion to the owner of the business that how
he will solve/handle to the problem when a situation arises to him that the
creditor ask for his money. if he reduce his extra expenses of the business, he
will get profit from the business. He deposits some money on interests of his
profit in a bank that will give him an extra profit. So in a short period of time the
owner will sum up sufficient amount of money so as to refund the payables.

Conclusion:
The net working capital is Rs.75, 000/-. So the net working
capital is positive. It means that there is no liquidity problem.