Working capital management

Working capital is the money tied up in a firm's current assets. Management of working capital has become an important and challenging job of the financial manager these days because the level of working capital affects risk-return trade-off. Therefore, the financial manager should spend a significant time in day to day operation of the firm that relates to the management of working capital.

Concept of Working Capital

There are 2 ideas of working capital: gross working capital and net working capital. Gross working capital simply refers to the total amount invested into current assets. It is represented by the firm's total investment into current assets.

The gross and net concepts of working capital are supplementary to each other. the gross concept emphasizes on the level of investment associated to total current assets. It focuses on maintaining an optimal level of current assets. A firm should hold neither excessive nor inadequate investment in current assets. on the other hand, the net concept of working capital indicates the firm's liquidity position as well as the financing pattern of current assets. It indicates whether the current assets have been solely financed by current liabilities or long-term sources are also used

The components of working capital

Current Assets  Read more

Current Liabilities Read more

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