what is working capital ?

  what is  working capital ?

The sum of all movable assets represented by both long-term and short-term liabilities will be considered as working capital. Whether movable assets are arranged on a long-term basis through share capital and other long-term loans or through liquid liabilities, there is no reduction in their utility and since all those movable assets are used in business operations; Therefore, all of them should be considered as working capital. The second argument is that since fixed assets are considered a symbol of fixed capital, movable assets should be considered a symbol of movable or working capital. According to the second opinion, "If the current liabilities are subtracted from the movable assets, then the amount that remains will be called working capital. In this, more emphasis is given on the qualitative aspect of working capital rather than the total quantity or quantity.": Classification of working capital

what is  working capital ?

Working capital is classified on the following two basis

 (1) based on concept – Based on concept, working capital can be divided into the following two parts:

(a) Gross working capital - Gross working capital means the total working capital, that is, the total working capital of all the current assets. In other words, when we do not subtract the total liabilities from the total current assets, then it is called working capital. Current assets include Cash in hand, Cash at Bank, Defters Stock, Short-term investment, Prepaid Expenses, etc.

(b) Net working capital Net working capital means such capital in which current liabilities are subtracted from current assets. in other words

The excess of current assets over liabilities is net working capital. Modern scholars consider this concept

Is considered appropriate.

In the form of the formula – Net working capital  Current assets – Current liabilities

Based on a broader view, working capital is equal to the sum of movable assets, thus this definition places more emphasis on the quantity of working capital. According to this definition, movable assets, no matter by what means they are obtained, are used in day-to-day operational activities and their form keeps changing, hence all of them should be considered as working capital. On the basis of narrow view, the balance that remains after deducting liquid liabilities from liquid assets can be considered as working capital. Thus, this approach does not emphasize on the quantity of working capital but on its qualitative aspect.

 Instead of emphasizing on the quantity of the organization, it emphasizes its qualitative aspect. Generally 'working capital' of any organization. It is invested in the stock of raw materials, partly in the stock of finished goods, in accounts receivable, in salable securities, and in cash. The capital employed in all these forms is continuously converted into cash and this cash again goes out in exchange for other forms of working capital. However, it should be kept in mind that the total value of all cash or cash equivalent assets cannot be considered as a measure of working capital. On the other side of the balance sheet, there is a group of liabilities which mainly consists of overdrafts, creditors, bills payable, and other short-term liabilities, which must be subtracted from the values ​​of these assets to determine the net working capital. Therefore, it would be appropriate to define working capital as the excess of current assets over current liabilities.

 (2) based on requirement, working capital can be divided into the following two parts-

(a) Fixed working capital – The need for movable assets based on related to the operating cycle, which in itself is a continuous process. Thus the need for movable assets is felt regularly. However, the amount of investment in movable assets is not always uniform. According to the level of production, the amount of investment in movable assets increases or decreases over some time. Nevertheless, there is a minimum level of liquid assets which is essential for the operation of the business, irrespective of the production level. This is the non-reducible minimum amount, which is necessary for the circulation of movable assets. This minimum investment in movable assets remains permanently in the business and hence it is called permanent fixed or regular working capital. It is permanent in the same way as investment in permanent assets. Needless to say, this type of working capital should be managed from a permanent source of finance.

(b) Variable Working Capital Apart from the permanent working capital, the amount of remaining working capital keeps changing according to the changes in production and sales. The requirement of working capital also varies due to seasonal changes or extraordinary conditions. The need for additional working capital to support changing business activities is considered variable working capital. For example, an increase in the price level will increase the amount of investment in the stock of raw materials, additional working capital will be required to face the problems arising from cut-throat competition, lockouts, strikes, etc., and special advertising and other incentives will be required for sales promotion. For this, additional working capital may be required.

components of working capital

Working capital has the following two components:

1. Current assets- Current assets mean such assets that are converted into cash within a short period, maximum within one year. Current assets mainly include the following assets

Cash in hand, Cash at the Bank, Debtors, Prepaid Expenses, Short-term Deposits, Bills Receivable, Book Debts ), Stock, Inventory or Merchandise, Marketable Securities.

2. Current Liabilities- Current liabilities mean such liabilities which are generally paid within 1 year. Current liabilities include-

Trade Creditors, Bank Overdraft, Payables, Provision for Taxation or Income Tax Due, Outstanding Expenses, Short-term Loans term loans) etc.

working capital requirement

Working capital plays an important role in the day-to-day activities of the business. Maintaining working capital is the lifeblood of business. In this regard, Kennedy and McMullan Bank have said "The study of working capital is very important for internal and external analysts. Because it is very closely related to the day-to-day operation of the business. Adequacy or poor management of working capital is an important factor in the functioning of the business." A major cause of failures." Business cannot be run merely by arranging capital for the owned property. For the normal progress of the business, along with the capital required for the fixed assets, the capital required for the loaned properties also has to be arranged. Capital is also required for purchasing raw materials, converting them into manufactured goods through manufacturing process, doing business of selling the goods and giving goods on credit to customers. This capital is raised through both long term and short term loans. Working capital is required for the following operations

1) To purchase raw materials.

(2) To purchase compounds and other components.

3) For the entire process of converting raw materials into manufactured goods.

(4) To pay administrative and office expenses.

(5) For selling expenses like packing and advertising.

(6) To maintain the stock of raw materials, semi-finished work and finished goods.

(7) To maintain strong liquid position of the business.

[28/12, 22:35] Navin Paradkar: 8) To pay daily expenses.

(9) To avail cash discount.

10) To take advantage of favorable market opportunities.

   what is the Factors Affecting Working Capital?

What should be the amount of working capital and what part of it should be kept permanent - there is no single common standard for this that can be applied to all companies. This question should be solved according to the circumstances of different businesses and different companies engaged in the same business. Keep this in mind while determining the quantity

It should be sufficient to meet all the ordinary expenses of the business, and the company should always have a minimum amount of liquid assets kept in reserve for the payment of contingent liabilities or for the purpose of obtaining a loan. Can go. The quantity should not be so much that an important part of it always remains useless. While estimating working capital the following factors should be kept in mind-

1. Nature of business – The nature of business has an important impact on the amount of working capital. Businesses with high and regular demand like transport organizations and other public utility enterprises can operate with relatively less working capital. There is constant demand for their services and their payment is immediate. In services like transport etc., the service is provided to the customers later by taking advance money. On the contrary, in business enterprises, where the work of distribution or buying and selling of goods is done, the fixed capital is not much but more working capital has to be kept. The reason for this is that a large part of the capital is spent in storing goods and lending goods. In basic industries, the amount of working capital is less as compared to fixed capital.

2. Size of business: With the size of the company, the need for both fixed capital and working capital increases. Small businesses do not require much working capital whereas in big companies, whose objective is to meet huge demand, the amount of working capital also increases along with fixed capital.

3. Duration of the production process – The time element is of utmost importance in production organizations. During the production period, construction works are financed through working capital. If the process of production is long, that is, the process of converting the raw material into finished form takes more time, then the requirement of working capital will increase, because the capital will remain stuck in the process under construction for a long period. Ship-building industry is a good example of this. Are. The shorter the duration of the production process, the lesser will be the amount of working capital required.

4. Size of inventory: There can be three types of goods in a company: raw materials and semi-finished goods. Liquid capital in all three types of goods is not very liquid and this element affects the working capital requirements of the organization more. For example, in the cotton textile industry, all three types of goods – raw, semi-finished, and manufactured – have high prices and their turnover is also slow. Therefore, the amount of working capital exceeds that of fixed capital. Such companies keep huge amounts of stock of all types of goods to keep the production process running smoothly and due to this the required amount of working capital increases.

5. Terms and conditions of purchase – In which months of the year and on what terms the raw materials are mostly purchased – this also affects the amount of working capital. If the entire annual requirement of raw material has to be purchased and kept in stock at the time of harvest, then there will be more need for working capital. On the contrary, if the company gets the same supply of raw materials from the local market throughout the year, then the situation will be different. Apart from this, whether the raw material is purchased on credit or in cash will also affect the quantity of working capital. If the raw material is obtained on credit, the payment for the raw material can be made by selling it after manufacturing it.

6. Terms of Sale: In almost all places and companies, manufactured goods are sold on a credit basis and their names are debited to the customers' accounts as per the local custom and tradition, the goods are sold within weeks, months, or three months. In case of receipt of payment earlier than the normal loan period, customers also ask for a cash discount which they have to pay. Payment for the goods is also often made through bills or bills of exchange, which on immediate encashment from the bank have to be given to the company at a discount that is equal to the interest on the bill or bill or bill on that amount. The time between selling the goods and receiving payment for it is more Or less different affects the working capital.

7. Relationship between terms of purchase and sale: Trade credit itself is an important means of working capital. If a company has to pay the price of purchased raw materials in cash but sells the manufactured goods to its customers on a credit basis; So in such a situation, it will need more working capital. If the conditions of purchase and sale are equal, then no difficulty will arise. Regular collection of bills receivable helps in the regular payment of matured bills payable. In such a situation, credit purchases will be financed through regular recovery of credit sales and the company will be able to run its operations with relatively less working capital. On the contrary, if the company has the facility of credit for the purchase of goods, but sells its goods in cash, then in such a situation it can operate with less working capital.

8. Seasonal nature of business – The business of many companies is more in a particular season of the year. In that season these companies will need more amount of working capital. The sugar mills of India are a good example of this. In these, production usually runs from November to April, and more working capital is required in these months. Another type of difficulty arises in the industries related to woolen goods, electric fans, water coolers, refrigerators etc. In these, production mostly takes place throughout the year whereas sales take place only during a particular season. They have to keep stock of goods till the arrival of the season, the financing of which requires more working capital, which is accomplished by taking short-term loans from banks.

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