KNOW ABOUT WORKING CAPITAL

WHAT ABOUT WORKING CAPITAL

Introduction:
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully with out an adequate amount of working capital.

Working capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the enterprise.

Meaning:

Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.



Objectives of working capital:

Every business needs some amount of working capital. It is needed for following purposes-

• For the purchase of raw materials, components and spares.
• To pay wages and salaries.
• To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc.
• To provide credit facilities to customers etc.


Factors that determine working capital:

The working capital requirement of a concern depend upon a large number of factors such as
? Size of business
? Nature of character of business.
? Seasonal variations working capital cycle
? Operating efficiency
? Profit level.
? Other factors
:
Sources of working capital
The working capital requirements should be met both from short term as well as long term sources of funds.

? Financing of working capital through short term sources of funds has the benefits of lower cost and establishing close relationship with banks.

? Financing of working capital through long term sources provides the benefits of reduces risk and increases liquidity
Types of working capital:

Working capital an be divided into two categories-

Permanent working capital:

It refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities.

Temporary working capital:

The amount of such working capital keeps on fluctuating from time to time on the basis of business activities.

Advantages of working capital:

• It helps the business concern in maintaining the goodwill.
• It can arrange loans from banks and others on easy and favorable terms.
• It enables a concern to face business crisis in emergencies such as depression.
• It creates an environment of security, confidence, and over all efficiency in a business.
• It helps in maintaining solvency of the business.


Disadvantages of working capital:

• Rate of return on investments also fall with the shortage of working capital.
• Excess working capital may result into over all inefficiency in organization.
• Excess working capital means idle funds which earn no profits.
• Inadequate working capital can not pay its short term liabilities in time.
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