INTRODUCTION TO THE TOPIC: DEFINITION OF WORKING CAPITAL The gross working capital concept focuses attention on two aspects

of current asset management: (a) Optimum investment in current asset; and (b) Financing of current assets. Following definition of working capital defines gross working capital Mead, Malott and Field. Working capital means current assets.

MEANING OF WORKING CAPITAL

Capital required for a business can be classified under two main categories via, 1) Fixed Capital 2) Working Capital

Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called Long term Funds or Fixed Capital. Long terms funds are required to create production facilities through purchase of fixed assets such as Plant & Machinery, Land, Building, Furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called Fixed Capital. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like Cash, Inventories, Marketable Securities, Debtors etc., is called Short-term Funds or Working Capital.. Working capital cycle involves conversions and rotation of various constituents components of the working capital. Initially cash is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition.

Cash

Creditors

Debtors

Raw Material

Working Expenses

Finished Goods

Work in process

Figure .1. WORKING CAPITAL CYCLE.

PRINCIPLES OF WORKING CAPITAL: To decide upon the optimum level of investment in various current assets i.e. determining the size of working capital. By optimizing the investment in current assets and by reducing the level of current liabilities, the company can reduce the locking up of funds in working capital thereby; it can improve the return on capital employed in the business. To decide upon the optimum mix of short-term funds in relation to long-term capital. The company should always be in a position to meet its current obligations which should properly be supported by the current assets available with the firm. By maintaining excess funds in working capital means locking of funds without return. To locate appropriate sources of short term financing. Maintaining working capital at appropriate level. The firm should manage its current assets in such a way that marginal return on investment in current assets is not less than the cost of capital employed to finance the current assets. Availability of sufficient funds at the times of need.

CLASSIFICATION OF WORKING CAPITAL Working capital may be classified in to two ways: On the basis of concept. Gross Working Capital Net Working Capital On the basis of time. Permanent or Fixed Working Capital: Regular Working Capital Reserve Margin or Cushion Working Capital Temporary or Variable Working Capital Seasonal Variable Working Capital Special Variable Working Capital