Working Capital

Management working capital is one of the key to a long-term success of a company (Denzil and Antony, 2007). Working capital is considered as the ‘oil’ for fixed capital ‘machine’. Without the ‘oil’, fixed capital earns nothing. There are a variety methods can be applied to manage working capital. It is great if management design the methods used in considering of business’s nature, economic world and in frame of risk tolerance.

The term ‘working capital’ relates to two concepts ‘Gross working capital’ and ‘net working capital’. Gross working capital is total current assets, which are expected to be sold, used within next 12 months or easy to convert to cash. According to IASB quoted in Pauline, 2010, currents assets are shown on the left side of the Balance Sheet; consist of cash and cash equivalent, other short-term investments, accounts receivable and inventory. A part of current assets is financed from short-term liabilities e.g. inventory can be purchased on credit. Thus, the term ‘Net Working Capital’ is the difference between current assets and current liabilities. Current liabilities are firm’s current obligations, which are expected to be settled within a year or in a normal operating cycle. Current liabilities are made up of overdrafts, accounts payable, taxation payable, short-term loans and accruals.   Working capital is considered as the factor in measurement the liquidity position of companies and in long term success of a company e.g. with high level of cash and cash equivalences, a company can either quickly expand their business or ensure their business run smoothly in the booming years. Because of the company’s health, management faces 2 objectives in dealing with working capital: liquidity and profitability. The shortage in cash and inventory may make an interruption in production; the excess of current assets can be expenses and tie up the capital. Consequently, managing working capital means maintaining working capital at adequate level,...