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Financial Management - WORKING CAPITAL MANAGEMENT

Background of Working Capital Management Dimension Of Working Capital Management

   Posted On :  22.06.2018 01:20 am

Working capital in general practice refers to the excess of current assets over current liabilities.

Background
 
Working capital in general practice refers to the excess of current assets over current liabilities. Management of working capital therefore, is concerned with the problems that arise in attempting to manage current assets, current liabilities and the inter-relationship that exists between them. In other words it refers to all the aspects of administration of both current assets and current liabilities.
 

What is working capital management?

 
The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained i.e., it is neither inadequate nor excessive. Companies face many problems involving investment in current assets and current liabilities like: What should be the level of investment in inventories and bills receivables? How much cash on marketable securities should be held? What should be the level of credit purchase and outstanding expenses? To what extent should the current assets be financed through long-term funds? What is sound working capital management policy? How to increase Return on Investment (ROI) with working capital management? These questions relate to the current assets and current liabilities of the firm, and belong to the field of working capital management. Working capital management is thus concerned with the profitability, liquidity and structured health of the organization. In this context, working capital management has five dimensions:

1. Dimension 1 is concerned with the formulation of policies with regard to profitability vs liquidity - Return and risk trade off

2. Dimension 2 is concerned with the decision about the determination of current assets to sales level

3. Dimension 3 is concerned with the decision about the financing of current assets

4. Dimension 4 is concerned with sound working capital management policy

5. Dimension 5 is concerned with other techniques used for working capital management such as

a. Ratio analysis

b. Over trading and under trading

c. Working capital leverage

Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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