Notes on Working Capital

The term working capital is the difference between current assets to current liabilities.  The need for working capital in a corporate needs no explanation.  The working capital is needed for stock of raw materials, work-in-progress, finished goods, book debts and cash balances.  Thus, a part of investment in current assets is generally financed by credit availed from suppliers of services and goods.  The investment in current assets should be twice of current liabilities.

It is a complete sequence and there is no need of current assets.   But it is not possible; the firm is forced to have current assets.   The cash inflows and outflows do not match.   Firms have necessity to keep cash or invest in shares or any other securities, so that it is possible in a position to meet the obligation whenever they are in need and when they become due.

CONCEPT:

Working capital may be regarded as the lifeblood of a business.  Its effective provision can do much to ensure the success of a business, while its inefficient management can lead not only to loss to profits but also to the ultimate downfall of what otherwise might be considered as a promising concern.  A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business.   The inadequacy or mis-management is the leading cause of business failures.  Working capital is the leading cause of that portion of the assets of a business which are used in, or related to current operations, and represented at any one time by the operating cycle of such items as against receivables, inventories of raw materials, stores, work-in-process and finished goods, merchandise, notes or bills receivables and cash.  “Working capital is the difference between the inflow and outflow and outflow of funds.  In other words, it is the net cash inflow.  It is defined as the excess of current assets over current liabilities and provisions.  In other words, it is “net current assets or net working capital”.

Working capital represents the total of all current assets.  In other words, it is “gross working capital” and provisions exceed current assets, the difference is referred to as negative working capital.

Working funds are the total resources of business.  Working funds are the total resources of a business concern and include internal and external equities, which are sunk in current and fixed assets.  Working capital funds, however, are in those, which are sunk only in the current assets of a concern.

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