Working capital refers to the current assets used in the operations of the company; whereas, the net working capital is current assets minus current liabilities of the company. It refers to that capital, which is required by the company to finance its day-to-day trading operations.
There are two main components of working capital, i.e. current assets and current liabilities. Thus working capital management involves the management of these two components. The management of a company should maintain the current assets and liabilities in a proportion that should minimize not only the cost of maintaining it but also the risk of losing the returns due to lack of liquidity etc.
There are many ways of funding the working capital. The management must choose the most appropriate source to fund its working capital requirement.
Here, in this chapter, we would discuss the components of current assets and liabilities and the ways to maintain the appropriate position of the same that minimizes both risk and costs. So basically we discuss in detail the appropriate amount of working capital, and how should it be financed.