General Definition of Working Capital Management
As quoted through the website study finance understanding working capital management is an accounting strategy that focuses on maintaining a balance between current assets and corporate liabilities.
Working capital management involves the relationship between the company's short-term assets and their short-term liabilities. In this case concerns the management of inventory, cash, and accounts receivable.
An efficient working capital management system often uses key performance ratios, such as working capital ratios, inventory turnover ratios and collection ratios. This ratio is useful to help identify areas that need focus in order to maintain liquidity and profitability.
Various Types of Working Capital Management
According to WB.
Taylor and Bambang Rianto (Journal Research) Working Capital that needs to be managed is classified into several types including permanent working capital, variable working capital, and emergency working capital.
1. Permanent Working Capital
Permanent working capital is the working capital available to the company to carry out its functions. You could say this working capital is the core of every activity in the company. Permanent working capital is divided into two different types, namely:
Primary Working Capital (Primary Working Capital): This working capital is the minimum amount of working capital that must exist in a company to maintain business continuity or working capital that is continuously needed for its business activities.
Normal Working Capital: In the normal production process the company requires working capital that must always be there. This working capital is called normal working capital.
2. Variable Working Capital
In this type of working capital owned by the company the amount varies according to changing circumstances. The cause of this change is usually due to external factors. There are two different types of forms in working capital, namely:
Seasonal Working Capital: Seasonal working capital due to fluctuations in seasonality. For example fruit processed food producers who follow the fruit season or clothing manufacturers who follow the trend that is being favored.
Cyclical Working Capital: Changes that occur in working capital are usually caused by fluctuations in conjuncture. So that the nature of working capital is like a cycle that continues to repeat like the influence of the Eid season on the price of chili and others.
3. Emergency Working Capital
Unlike the variable working capital that can be estimated, the cause of changes in emergency working capital is not known in advance. Circumstances which include this emergency can be like labor strikes, floods, sudden economic changes and so forth.
Working Capital Management Concepts
In working capital management there are several concepts of working capital that are often used. This concept describes the funds that are rotated continuously so that the company's main operations can continue to run in accordance with company policy.
In general the concept of working capital is divided into 3, namely: quantitative concepts, qualitative concepts, and functional concepts. The following is a brief explanation
1. Quantitative Concepts
The quantitative concept states that working capital is all current assets. The main concern of this concept is how management suffers from the need for funds to finance the company's operations in the short term. This concept is often referred to as gross working capital.
2. Qualitative Concepts
Qualitative concept, a concept that focuses on the quality of working capital. One way is to look at the difference between the amount of current assets and current liabilities. This concept is also called net working capital.
The advantage of this concept is the level of company liquidity will be seen.
3. Functional Concepts
The functional concept, emphasizes the function of funds owned by the company in obtaining profits. That is, a number of funds owned and used by the company to increase corporate profits.
Benefits of Working Capital Management
When a company does not have enough working capital to cover its obligations, it can certainly lead to bankruptcy, liquidation of assets and so forth. So, it is very important for all businesses to have adequate management of working capital.
Now with an effective capital management system in addition to the problem of funds can be overcome, the company's revenue can also increase.
That's a little about working capital management. Hopefully this will be useful enough for me and thank you very much. See you in the next article.
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