Working Capital Management

Working capital management is concerned with the issues that emerge in endeavoring to deal with the current liabilities, the current assets and the interrelations that exist between them (Irfanullah, 2011). Working capital management is mainly concerned with ensuring that an organization is able to carry out its day-to-day activities by being able to pay short-term debts (e.g. creditors) and operational expenses. This is done through control of accounts payable and receivable, inventories and cash.

There are two concepts of working capital according to the video working capital management: Net working capital and gross working capital. The gross concept refers to working capital as all the current assets in an organization and the monies invested in these assets. Current assets are resources which do not last more than a fiscal year in an organization and can be converted into cash in the short-term. Some examples of the current assets are payments receivable, cash in hand, inventory, cash at bank, prepaid expenses, marketable securities, office supplies and advance payments on future purchases. The sum of all these current assets in an organization makes up the working capital.

The net concept views the working capital as current assets minus current liabilities. This concept is useful in the endeavor of financing current assets over the current liabilities, and in defining the financial soundness and solvency of an organization. A positive net working capital signifies the current assets are in excess of the current liabilities and therefore it is able to carry out its operations effectively, while a negative net working capital implies that the current liabilities are in excess of the current assets and is not good for the daily business operations.

 

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