Working Capital Management

CHAPTER ONE

1.1 INTRODUCTION

The term working capital refers to the capital available for running the day to day operations of an organization working capital originated from the old Yankee peddler who would load up hid wagon with goods and then go off on route to peddle his wares.

The merchandise was called working capital because it was what he actually sold to produce his profit. The wagon and horse were his fixed assets. He generally owned the horse and wagon and they were financed with “equity” capital but merchandise were financed with borrowed funds. These borrowed funds were called working capital loans and they ahs to be repaid after each trip to demonstrate to the bank that the credit was sound. If the peddler was able to pay the loan, the bank would grant him another loan. When this procedure are being followed up by the banks; it means that the banks are employing “sound banking practices”

Working capital is defined as current assets less current liabilities. Examples of current assets are cash, stock, debtors, prepayments, while current liabilities include trade tractors, expense creditors, bank overdraft, loan creditors etc. working capital management involves the administration, within policy guidelines of currents assets and current liabilities.

Working capital is one of the requirements of a new firm most often underestimated by entrepreneur makes provisions for research and development and for plant and equipment required to produce the firm’s produces. But working capital is frequently a surprise to the entrepreneur- he or she expects to come up with a product that the Markey will immediately accept and the market will immediately accept and for which it will pay substantial premium, this premium price will lead to very high profit margins which will in turn “financee” all of the firms other needs. As naira as this point of view appears to be, it is nevertheless common among less experienced founders of new businesses. Working capita; can be financed by both short tem and long term sources.

The components of working capital management include stock management, debtor’s management, cash management; stock management is concerned with the efficient management of stocks to attain an optimum level of stocks in a firm’s working capital.



REFERENCES

(1) WERNER F.M AND STONER J.A.E (1995) – Modern Financial Managing, Continuity and Chance (New York: Harper Collins College Publishers)
(2) OLOWE, R.A (1998): Financial Management Concepts, Analysis and Capital Investments (Lagos: University of Lagos Press).
(3) EUGENE, F.BRIGHAM AND J.F. HOUSTON (1996): Fundamentals of Financial Management: Corlando. The Dryen Press Harcourt Brace College Publishers.