1. W O R K I N G C A P I T A L R E F E R S T O T H O S E A S S E T S
W H I C H A R E R E Q U I R E D F O R T H E D A Y T O D A Y
W O R K I N G O F T H E C O M P A N Y .
E G : P U R C H A S E O F R A W M A T E R I A L S , P A Y M E N T O F
S A L A R I E S , W A G E S , R E N T , A D V E R T I S I N G E T C
Working capital
2. KINDS OF WORKING CAPITAL
A. On the basis of concept
I. Gross working capital
II. Net working capital
B. On the basis of time
I. Permanent working capital
II. Temporary or variable working capital
3. I. Gross working capital
๏ It refers to firms investment in total current
assets
๏ It requires that a firm should have adequate
investment in current assets and proper
management of these assets. Their should be neither
excessive nor inadequate assets and it should be
responsive to the changing requirements of business
which depend on the level of business.
4. Net working capital
๏ It is the difference between current assets and
current liabilities. When current assets is higher than
current liabilities net working capital will be
positive but if current liabilities exceed current assets
then net working capital will result in negative.
๏ Net working capital = current assets โ current
liabilities
5. On the basis of time
๏ Permanent working capital
It will remain permanently in business and will not
be returned until the business is wound up.
Eg: Every business has to maintain a minimum level of raw
materials, work-in-progress, finished goods and cash
balance.
๏ Temporary or Variable working capital
๏ทIt is the amount of working capital required for
short periods
๏ทIt is intended to meet seasonal demands and some
special emergencies
6. Needs of working capital
๏ For the purchase of raw material
๏ To pay wages and salaries.
๏ To meet selling costs such as packing, advertising
etc.
๏ To provide credit facilities to the customers.
๏ To maintain the inventories of raw material, work-
in-progress, and finished stock.
7. Factors affecting working capital
a. Nature of business
b. Business cycle/Operating cycle
c. Seasonal variations
d. Credit policy
e. Availability of raw materials
f. Dividend policy
g. Relation with banks
h. Rapidity of turnover
i. Growth and expansion of business
8. DANGERS OF INADEQUATE WORKING CAPITAL
๏ Cannot pay short-term liabilities in time
๏ Not able to get good credit facilities
๏ loose its reputation.
๏ Cannot buy requirements in bulk so it will not get
Discounts etc.
๏ Difficult to exploit favorable market conditions.
๏ Create inefficiencies.
๏ Impossible to utilize fixed assets efficiently.
๏ Rate of return on investments fall.
9. Operating cycle
๏ Working capital is required because of the true gap
between sales and their actual realization of cash.
๏ Operating cycle of a Manufacturing concern
๏ Raw material Finished
goods
Work in
progress
Cash Accounts
Receivables