In the previous section, we read about the usefulness of maintaining accounts for understanding and taking stock of the organisation’s performance in order to carry out a SWOT (strength, weaknesses, opportunities and threat) analysis of organisation and make appropriate decision for the growth of the enterprise. In this section, we shall focus specifically on the role of accounting for working capital management.
We will hardly find a running business firm that does not require working capital.Since working capital is pre-requisite for a business enterprise, its management is an integral part of the overall corporate management. The goal of working capital management is to manage the firm’s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.We have already learned in Unit 5, what are current assets and current liabilities.
To refresh our memory, let us define the same again. The term current assets refers to those assets which in the ordinary course of business can be, or will be,turned into cash within one year without undergoing a decrease in value and without disrupting the operations of a firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities that are intended at their inception to be paid in the ordinary course of business, within a year, out of the current assets, or earning of the business. The basic current liabilities are accounts payable, bills payable, bank over-draft and outstanding expenses.
The information on each of these items of current assets and liabilities, sources and uses of working capital is contained in accounting statements. These statements provide an insight to the management on the following questions:
We will hardly find a running business firm that does not require working capital.Since working capital is pre-requisite for a business enterprise, its management is an integral part of the overall corporate management. The goal of working capital management is to manage the firm’s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.We have already learned in Unit 5, what are current assets and current liabilities.
To refresh our memory, let us define the same again. The term current assets refers to those assets which in the ordinary course of business can be, or will be,turned into cash within one year without undergoing a decrease in value and without disrupting the operations of a firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities that are intended at their inception to be paid in the ordinary course of business, within a year, out of the current assets, or earning of the business. The basic current liabilities are accounts payable, bills payable, bank over-draft and outstanding expenses.
The information on each of these items of current assets and liabilities, sources and uses of working capital is contained in accounting statements. These statements provide an insight to the management on the following questions:
- What is the magnitude of current assets, current liabilities and hence working capital?
- What are the items causing changes in current assets and liabilities?
- What are the various sources of working capital and how they have changed over the years?
- To what uses the working capital has been put to?
A precise answer to the above questions in quantitative terms is the key to efficient management of working capital. Since accounting statements provide this information, undoubtedly, accounting is an essential input for working capital management.
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