Working capital result presents a classic illustration of the risk-return scenery of financial decision creation. Raising a firm’s net working assets, present assets less present liabilities, decrease the risk of a firm not being capable to pay its bills on time. These at the identical time decrease the overall productivity of the firm. Working capital management occupy the risk-return trade-off: not taking additional risk unless compensated with additional returns. The existence of a firm according to Ross depends on the capability of its management to run the firm’s working capital. The working capital management engages the course of altering investment in inventories and accounts receivables into cash for the firm to exercise in paying its operational bills. As such, working capital management she supplementary, is thus at the awfully heart of the firm’s day to day operating atmosphere, and civilizing corporate profitability.
There are two notion of working capital as i. Quantitative and ii. Qualitative. A few people also define the two notions as gross idea and net idea. According to quantitative notion, the sum of working capital refers to ‘totality of current assets’. According to Smith, current assets means, ‘circulating capital’. Current assets are considered to be gross working capital in this notion.
The qualitative notions give an idea concerning basis of financing capital. According to qualitative idea the amount of working capital refers to “surplus of current assets over current liabilities. According to L.J. Guthmann, working capital as the piece of a firm’s current assets which are financed from extensive–term funds.
Structure of Current Assets and Current Liabilities
|Current Liabilities||Current Assets|
|Bank Overdraft||Cash and Bank Balance|
|Outstanding Expenses||Spare Parts|
|Bills Payable||Accounts Receivables|
|Short-term Loans||Bills Receivables|
|Proposed Dividends||Accrued Income|
|Provision for Taxation, etc.||Prepaid Expenses