CONCEPT OF WORKING CAPITAL

BY HARPREET SINGH MBA 3rd SEM

Definition
Working capital refers to the cash needed by a business to meet its day to day operations. In general practice working capital refers to the excess of current assets over current liabilities. Working capital=current assets-current liabilities

Current assets includes:

Inventories Trade debtors Prepaid expenses Loan and advances Short-term Investment Cash and bank balance

Current liabilities includes:

Sundry creditors Bank overdrafts Short-term loans Provisions

Objectives
To sustain sales activity To pay wages and salaries To incur day-to-day expenses To meet selling costs To provides credit facilities to the customers To maintain the inventory level

Kinds of working capital

On the basis of concept

On the basis of time

Gross working capital

Net working capital

Fixed working capital

Variable working capital

Nature of Business Size of Business Production policy Length of production cycle Seasonal variations Working capital cycle Rate of stock turnover Credit policy Business cycles Rate of growth of business Earning capacity and dividend policy Price level changes Tax liability

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT

IMPORTANCE OF ADEQUATE WORKING CAPITAL

Solvency of the business Goodwill Easy Loans Cash Discounts Regular payment of salaries ,wages and other day-to-day commitment Ability to face crisis Regular supply of raw material Quick and regular return on investments.

Disadvantages of inadequate working capital

Unable to adapt to Changes Trade discounts are Lost Cash discounts are Lost Adverse effect on Financial Reputation Insolvency

Working capital policy

Three types of Working capital policy

Defensive policy

Aggressive policy

Moderate policy

Computation of working capital

Net current assets forecasting method Projected balance sheet method Working capital based on operating cycle

Working capital management

Working capital management involves the management and control of the gross current assets. Working capital management involves deciding upon the amount and composition of current assets and how to finance these assets.

Working capital management includes:

Cash Management Inventory Management Debtors Management Short-term Financing

Objectives of working capital management

To meet day-to-day cash flow needs. To pay wages and salaries when they fall due. To pay creditors to ensure continued supplies of goods and services. To pay government taxation To ensure the long-term survival of the business entity.