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bove definition, working capital of a company can take one of the following forms.

Positive working capital: current asset is greater than current liability

Negative working capital: current asset is less than current liability

Zero working capital: when current asset equals current liability

It is generally accepted that higher the positive working capital, better will be the firm liquidity position.Furthermore, managing working capital is not just related to current asset and current liability but it also relies on fixed assets and long term funds. (Satyaprasad, B.G. Raghu, G.A. 2010)

Factors which determine working capital:

There are various factors which determine the amount or level of working capital for a particular business. These factors are positioned in the following diagram:11.png

Source: Satyaprasad, B.G. Raghu, G.A. 2010

Financing of Working Capital and Liquidity:

Once the size of working capital is determined, then the management of the company need to decide the financing of working capital. There are three major policies to finance working capital called conservative policy (Approach A), Average policy (Approach B), and Aggressive policy (Approach C). If a company invest huge amount of money on current asset rather than fixed asset then it is considering conservative approach. Similarly, if the business invest average in current asset then it follows Average working capital approach. Finally, if the business is investing very less on current asset or in other word, business consider its focus on investing heavily on fixed assets then it said to be Aggressive policy or approach. These approaches are best described in the following diagram. (Satyaprasad, B.G. Raghu, G.A. 2010)1212.png

Source: Satyaprasad, B.G. Raghu, G.A. 2010

Working capital management is also referred to operating efficiency. It all about How efficient the management of a firm could manage its inventory, receivable and payables to reduce short term liquidity problems. The best operating firms never want to have inventory sitting idly in a warehouse for months or years, and at the same time they never run out of product when it comes to selling point of view. Companies are on buying products, raw material from suppliers on credit term and the more the period available to pay off its debt for a company, the lesser liquidity problems will arise. Similarly, companies sell products or services to customer. The period of time the company receive their money from customer also have a huge impact on the liquidity of a firm. Therefore, Companies need to consider several ratios such as Inventory turnover, payable turnover, and receivable turnover in order to reduce the risk of liquidity. Nevertheless, operating efficiency and ratio analysis reduce the liquidity problems in short period of time. (Money-Zine. 07.02.2013)

参考文献-REFRENCES

Atrill Peter, McLaney Eddie. (2011). Financial Accounting for decision Makers, sixth edition. Published by Pearson Education Limited

Avadhani, V.A. (2010). International Financial Management. Management of Longterm International Financing. Published by. Himalaya Publishing House

Catalogue Pearsoned. Accounting Rules and Regulation. Accessed by 02.09.2013

Elliott. B and Elliott. J. (20