PRAJEEN KUMAR.

Capital

Fixed capital

Working capital

Fixed Capital
Fixed capital/long term funds is required to meet long term obligations namely purchase of fixed assets such as plant & machinery, land, building ,furniture etc.

Working capital
Any business requires funds to meet short term purposes such as purchase of raw materials, payment of wages, and other day-to day expenses. These funds are called working capital. An inefficient management of working capital leads to not only loss but also to the closure of the business firm.

It is the capital required for meeting the routine affairs of an organization. In the words of Shubin, Working Capital is the amount of funds necessary to cover the cost of operating the enterprise.

Concepts of Working capital

Gross working capital

&
Net working capital

Gross working capital

Generally, working capital refers to the gross working capital and represents funds invested in total current asset of the firm. That means according to this concept working capital means total current assets.

Net working capital

It is the excess of current assets over current liabilities. Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive. Negative working capital results when current liabilities exceed current assets .

Management of working capital

There are two types of assets in each concern that is fixed asset and current asset. Both type of assets are to be managed efficiently so as to earn maximum profit with minimum possible investment. The accomplishment of the prime object maximization of profit in most businesses depends largely how their working capital is managed.

Meaning of Working Capital Management.

The management of WC or current asset is as important as or, rather more, important than the management of fixed assets because the fate of most of the business very largely depends upon the manner in which their WC is managed.

The problem of working capital management involves the problem of decision making regarding investment in various current assets with an objective of maintaining the liquidity of funds of the firm to meet its obligations promptly and efficiently. The management of working capital encompasses the following problems;

1. To decide upon the optimal level of

investment in various current assets, i.e. determining the size of working capital. 2. To decide upon the optimal mix of short term funds in relation to long term capital 3. To locate the appropriate means of short term financing.

The study of working capital management is incomplete unless we have an over all look on the management of current liabilities. Determining the appropriate levels of current assets and current liabilities of levels of working capital involves fundamental decisions regarding firms liquidity and the composition of firms debts.

Objective of Working Capital Management

1. Maintenance of appropriate level. working capital at

2. Availability of ample funds as and when they are needed.

Importance of WC Management
There is a positive correlation between the

sale of the product of the firm and the current assets. An increase in the sale of the project requires a corresponding increase in the current assets.so it is to be managed efficiently. In emergency fixed asset can be acquired on lease but there is no alternatives for current assets. Investment in current assets ,can in no way be avoided.

 More than half of the amount invested in

the current asset. So the management must give importance to the same.

Working capital needs are more often

financed through outside sources, so it is necessary to utilize them in the best way possible.

Types of working capital

1.Permanent working capital working capital has a life of one year.in practice some part of the investment is always permanent. Some investment is always locked due to the non stoppage of production. It may be in the form of raw materials, work in progress, finished goods, book debt and cash. it will carried forward to the next year.

2.Variable working capital This is the amount of investment required to take care of the fluctuations in the business activity. While permanent working capital is meant to take care of the minimum investment in various current assets, variable working capital is expected to care for the peaks in the business activity.

wor kin g cap ital

fluctuating/variable

fixed/permanent

Operating cycle & working capital

Cash

Accounts receivable

Raw materials

Finished goods

Work in progress

The basic aim of financial management is to maximize the wealth of the shareholders and in order to achieve this; it is necessary to generate sufficient sales and profit. However sales do not convert on to cash instantly. The time between purchase of inventory items for the production and their conversion in to cash is known as operating cycle or working capital cycle.

Receipts from debtors

cash

Purchase of raw material

Creation of account receivable Sale of finished goods Warehousing of finished goods Office,selling & distribution expenses

Creation of accounts payable

Payments to creditors Manufacturi ng operations