Working capital can be understood as the fund required for meeting the day to day expenses of the business entity. An effective management of the working capital is very essential for the success of the organization. Working capital can be understood in two ways i.e. Gross and Net working capital. Gross working capitals are those funds which are invested in various components of current assets such as cash, receivables and inventories. Net working capital can be understood as the difference between current assets and current liabilities.
Responsibility of a Finance Manager with related to Working Capital
A finance Manager of an organization takes three broad decisions related to working capital management, they are;
Working capital comes into business operation when actual operation takes place. Generally, the requirement of quantum of working capital is determined by the level of production which depends upon the management attitude towards risk and the factors which influence the amount of cash, inventories and receivables and other current assets needed to support the given volume of production
Current Assets and Fixed Assets Financing
The more of the funds of a business are invested in working capital means lesser the return in terms of profitability and less amount is available for investing in long term assets such as plant and machinery etc. Therefore, the organization has to minimize investment in working capital and concentrate on investment of resources in fixed assets. The decision on the investment will be based on the economic conditions prevailing at particular time. Current assets usually are converted into cash within an accounting cycle in one year. Cash is used to purchase raw material etc. to create inventories. When inventories are sold there will be accounts receivables. Collection of receivables brings cash into company that will automatically form a circle.
Working capital decisions are very crucial for any kind of organization. The finance manager of the organization must be able take the suitable decision on working capital allocation. There cannot be too much fund reserved for working capital, which will reduce the investments in other assets, so right decision on working capital is very important. An expert advice in the field of finance will reduce the risk of working capital decisions. The consultants at Emirates Chartered Accountants Group will assist you for the right decision on working capital. You may reach at email@example.com