Question based on DIMS MBA Assignment Solution and other course
Answer:
There is no uninomous decision with the definition of working capital. The word working with reference to capital refers to circulation of capital from one form to another during day-to-day operations of business. The word capital refers to the monetary values of all assets of the business. There is lot of difference of opinions among accountants, enterpreneurs and economists. There are two concepts of working capital:
Gross Working Capital : It referred to as working capital, means the total current assets.
Net working capital : It can be defined in two ways (i) the most common definition of net working capital is the difference between current assets and current liabilities, and (ii) alternate definition of Net working capital is that portion of current assets which is financed with long term funds.
Net working capital as a measure of liquidity, is not very useful for comparing the performance of different firms, but it is quite useful for internal control. The goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of net working capital is maintained.
Another concept is “operating concept.” The duration or time required to complete the sequence of events right from purchase of raw materials/goods for cash to the realisation of sales in cash is called the operating cycle or working capital cycle.
The net duration of operating cycle is calculated by adding the number of days involved in the different stages of operation. This concept is more appropriate than others. According to this concept, the necessary liquid funds required by a firm for production, administration and selling can be determined for the whole year. If cash working capital requirements are known in advance, then non-cash current assets may be better managed. Now it is an important tool in projecting working capital requirements of an enterprise.
