What do you mean by Working Capital Article shared by The term working capital is commonly used for the amount required for holding current assets like stock of raw material and finished goods, bills receivable, debtors and cash and also to meet the day to day expenses like salareis and wages, rent, taxes etc. The term working capital is used in two senses — Gross working capital and net working capital.
These terms have been discussed above. This capital is permanently locked up in the current assets to carry out the business smoothly.
This investment in current assets is of the permanent nature and will increase as the size of business expands. Permanent working capital is that minimum amount of investment in raw materials, work-in-process inventory, finished goods, stores and spares, accounts receivable and cash balance which a firm is required to have in order to carry on a desirable level of business activity.
Such an amount cannot be reduced if the firm wants to carry on the business operations without interruption. It is that minimum amount which is absolutely essential throughout the year on a continuous basis for maintaining the circulation of current assets.
Minimum cash is required for making payment of wages, salaries, and other expenses; minimum stock is required to maintain regular supplies and minimum investment in debtors is essential on account of credit sales according to the period of credit allowed to the customers.
Since the requirement of permanent or hard core working capital is on a permanent basis, such working capital should be financed out of long-term funds.
Characteristics of permanent working capital: It is the minimum amount of liquid capital needed to keep up the circulation of the capital from cash to inventories, to receivable and again to cash. This would include sufficient minimum bank balance to discount all bills, maintain adequate supply of raw materials etc.
It is the excess over the needs or regular working capital that should be kept in reserve for contingencies that may arise at any time. These contingencies include rising prices, strikes, special operations such as experiments with new products etc.
Variable working capital requires changes with the increase or decrease in the volume of production or business.
Variable working capital can be classified as: The working capital required to meet the seasonal needs of the industry or business is known as seasonal working capital.
For example, if an enterprise is marketing woolen garments, it needs more money for that purpose during winter months than in summer season. They are all Seasonal products. Special working capital is that part of the variable working capital which is meant for meeting the special business operations such as extensive marketing campaigns, experiments with products or methods of production, etc.
The distinction between fixed and variable working capital is of great significance particularly in raising the funds for an enterprise.
Fixed working capital should be raised in the same way as fixed capital is procured. Variable working capital is procured out of short-term borrowings from the bank or from the public.
Factors Affecting Requirements for Working Capital: In addition to the investment in a fixed asset, it is sometimes necessary to carry additional cash, receivables or inventories.
This investment in working capital is treated as a cash outflow at the time it occurs. The working capital needs of a firm are influenced by the following factors: A machine tool manufacturing concern which has a long operating cycle and sells largely on credit has a very substantial working capital requirement.
On the other hand a service firm, such as an electricity undertaking or a transport corporation with a short operating cycle and sales predominantly on cash basis, has a modest working capital requirement. A firm manufacturing seasonal products such as fans, coolers, woolen clothes etc.The working capital of a business enterprise is measured on the basis of its funds locked up in various current assets such as inventors, accounts receivables and cash & bank balance.
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Working capital is a financial element which represents and referring to the operating liquidity available to an organization, business or other entity, including governmental entity.
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Meaning and Concept of Working Capital: Working Capital refers to a firm’s investment in short term assets-cash, short term securities, accounts receivable and inventories. Net Working Capital is defined as current assets minus current liabilities.