Working capital defines as current assets net working capital defined as current assets minus current liabilities. The management of working capital involves managing inventories, accounts receivable and payable, and cash.
Working Capital Management: Working capital management is the management of both current assets and current liabilities – the top half of the balance sheet. Working capital management involves decisions about the level of current assets to be held, the composition of those assets and how current assets are to be financed. The primary goal of working capital management is to sufficiently maintain the operations of a company. The main reason of WCM is to make sure the company constantly maintains adequate cash flow to meet its short-term operating costs and short-term debt obligations. It helps maintain the smooth operation of the operating cycle and can also help to improve the company’s earnings and profitability.
Net operating working Capital: Current assets minus non-interest bearing current liabilities.
The procedure is used constantly to function and make cash flow to meet the need for short-term obligations and daily operational expenses. The efficiency of working capital management can be measured through a variety of methods and ratios.
Working capital policy: Basic policy decisions regarding –
- Target levels for each category of current assets; and
- How current assets will be financed.