Define Working Capital Management. Explain the types of Working Capital?

Working Capital Management:

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.

Types of Working Capital:

Working capital is classified into different types and the classification is based on the following views:

1. Balance Sheet View: Gross working capital & Net Working Capital.
2. Operating Cycle View: Fixed Working Capital  & Variable working capital
3. and  additionally based on temporary need based Seasonal working capital &Special working capital

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The process of managing activities and processes related to working capital. This level of management serves as a check and balances system to ensure that the amount of cash flowing into the business is enough to sustain the company's operations. This is an ongoing process that must be evaluated using the current level of assets and liabilities. Working capital management may involve implementing short-term decisions that may or may not carry over from one earnings period to the next.

Working Capital Management involves managing the level and mix of current assets and current liabilities and some long-term. It also involves the planning and utilization of a firm’s current or short-term funds to finance the short-term liabilities that are needed to support the current assets of a firm.

Short-term, or current, assets and liabilities are collectively known as working capital.

Net working capital is the difference between current assets and current liabilities. It helps indicate the liquidity position of firm and the extent to which working capital needs may be financed by the permanent sources of funds.

Working capital policy involves two basic questions:

1. What is the appropriate amount of current assets for the firm to carry, both in total and for each specific account?

2. How should current assets be financed?

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Simply, Working capital as per most of accounting books is the difference between Current Assets & Current Liabilities.

But some books define2 types

that working capital refer to Current Assets

and net working capital represent to the difference between Current Assets & Current Liabilities.

There are3 types of working capital

1- Negative Working Capital (Current Assets < Current Liabilities.

2- Positive Working Capital (Current Assets > Current Liabilities.

3- Balanced Working Capital (Current Assets = Current Liabilities.

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