Working Capital Management Theories Introduction - Working Capital Management

Theories of Working Capital Management

Working capital is said to be the life blood of a business.Working capital signifies funds required for day-to-day operation of the firm. In financial literature, there exist two concepts of working capital namely: gross and net. Accordingly, gross concept working capital refers to current assets viz: cash, marketable securities, inventories of raw materials, work-inprocess, finished goods and receivables. According to net concept, working capital refers to the difference between current assets and current liabilities. Ordinarily, working capital can be classified into fixed or permanent and variable or fluctuating parts.

The minimum level of investment in current assets regularly employed in business is called fixed or permanent working capital and the extra working capital needed to support the changing business activities is called variable or fluctuating working capital.

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