Define working capital, net working capital, and working capital management. What is the role of the manager in working capital management? What are marketable securities? What are the two main types of marketable securities?
Working capital is the amount or capital required for day to day operation of the business like payment of wages. We arrive at working capital by deducting current liabilities from current assets.
Working capital usually means current assets only. But when we deduct current liabilities from current assets it appears as net working capital. Thus, net working capital means current assets minus current liabilities.Net working capital uses the current items from the balance sheet for the calculation.
Working capital management is a strategy used to manage its current assets( like account receivable, cash, inventory, short term investment) and current liabilities ( like accounts payable, short term debt) effectively so that sufficient fund is available to manage it's day to day operations.
The role of manager in working capital management is to increase the profitability of the business, ensuring the availability of sufficient resources, maintaing the liquidity of the firm, maintaining good relation with suppliers and creditors, avoiding underutilisation of resources and getting the true insights of the financial statements.
Marketable securities are the short-term securities that are easily convertible into cash. Marketabile securities are usually of less than one year of maturity and one can easily buy or sell it in the market.
Marketable securities are of two types: