The term working
capital refers to the amount of capital which is readily available to an organisation. That is, working capital is the difference
between resources in cash or readily convertible into cash (Current Assets) and organisational commitments for which cash
will soon be required (Current Liabilities).
are resources which are in cash or will soon be converted into cash in "the ordinary course of business".
are commitments which will soon require cash settlement in "the ordinary course of business".
= CURRENT ASSETS - CURRENT LIABILITIES
In a department's
Statement of Financial Position, these components of working capital are reported under the following headings:
Liquid Assets (cash and bank deposits)
Debtors and Receivables
Creditors and Payables
Other Short Term Liabilities
of Good Working Capital Management
constitutes part of the Crown's investment in a department. Associated with this is an opportunity cost to the Crown. (Money
invested in one area may "cost" opportunities for investment in other areas.) If a department is operating with more working
capital than is necessary, this over-investment represents an unnecessary cost to the Crown.
From a department's
point of view, excess working capital means operating inefficiencies. In addition, unnecessary working capital increases the
amount of the capital charge which departments are required to meet from 1 July 1991.
to Working Capital Management
of working capital management is to maintain the optimum balance of each of the working capital components. This includes
making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximising
the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.
management takes place on two levels:
Ratio analysis can be used to monitor
overall trends in working capital and to identify areas requiring closer management (see Chapter Three).
The individual components of working
capital can be effectively managed by using various techniques and strategies (see Chapter Four).
these techniques and strategies, departments need to recognise that each department has a unique mix of working capital components.
The emphasis that needs to be placed on each component varies according to department. For example, some departments have
significant inventory levels; others have little if any inventory.
capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient
working capital management must be considered in relation to other aspects of the department's financial and non-financial