The time of commencement of business is known

The capital which is required to finance
current assets is called working capital. That is in operating daily business
of the firm effectively, some resources are needed and the capitals which are
needed to finance, these resources is called

 working capital.1

 

“Working
capital may be defined as all the short term assets used in daily
operation”—John. J Harpton.

 

Working capital is defined varyingly keeping in
view the objectives and purposes. To businessmen, working capital comprises
current assets of business whereas to the accountant/creditors/investment
analysts working capital is understood as the difference of current assets
minus current liabilities. This is also called the Net Working Capital. There
is operative aspects of working capital i.e. current assets (which is known as
‘funds’also) employed in the business process form the gross working capital.
Current assets comprise: cash, receivables, inventories, marketable securities
held as short-term investment and other items near cash or equivalent to cash.
This is also known as going-concern concept of working capital.2

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i.       
Types
of Working Capital –

 

          The working capital in
certain enterprise may be classified into following types:

 

a)   Initial Working Capital – The capital which
required at the time of commencement of business is known as initial working
capital.

b)   Regular Working Capital – It is the kind of
capital which is required to meet current expenses like purchasing raw material
and supplies, payment of wages, salaries and other regular expenses of
organisation.

c)    Reserve Margin Working Capital – This type of working
capital generally utilized at the time of contingencies like extension of
machinery, inflation, strike, lay off, natural calamities, etc.

d)   Long-term Working Capital – The working capital
represents the amount of funds needed to keep a company running in order to
satisfy the demand at the lowest point in long term is called as Long-term
Working Capital.

e)   Short-term Working Capital – This type of working
capital varies from one firm to another & also varies due to activity of
organisation.

Temporary
working capital should be obtained from such sources, which will allow its
return when it is not in use.3

f)    Gross Working Capital – Gross working capital refers to the
firm’s investment in current assets. Current assets are those assets which can
be converted in to cash with in an accounting year and includes cash short-term
securities, debtors bills receivable and stock.4

g)   Net Working Capital – Net working capital refers to the
difference between current asset and Current liabilities. Current liabilities
are those claims of outsiders, which are expected to mature for payment within
accounting year and include creditors, bills payable and outstanding expenses.
Net Working capital can be positive or negative. A positive net working capital
will arise when current assets exceed current liabilities.5

 

ii.       
Determinant &
Assessment of Working Capital –

 

Working capital is constantly affected by the
criss-crossing economic currents flowing about a business. The nature of firm’s
activities, the industrial health of the country, the availability of material,
the ease or tightness of the money markets are all part of these shifting
forces. It is difficult to rank them because the influence in individual items
rises and wanes over the years as a company’s internal policies and environment
in which it operates change6.

 

The factors are –

 

a)  
The requirement of working capital of an
organization depends upon the nature & size of business.

b)  
Production polices.

c)   
Growth of business.

d)  
Competitive Conditions.

e)  
Dividend policy.

f)   
Working capital varies due to sales
policies.

g)  
The greater the risk, more the need of
working capital.

 

The formula which is used for assessing the
working capital requirement is listed below:

 

A.   
Cash                                       
                       XXXX

Account
Revivable                                       XXXX

Inventory                                                       XXX

Total of A (Current Assets)       =                 XXXXX

Less:

B.     
Accounts Payable                                          XXXX

Short
term borrowings                                  XXXX

Accrued
liabilities                                          XXXX

Total of B (Current Liabilities)  =        XXXXX

Working
Capital = Total of A – Total of B

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Lesson 8- Working Capital – Financial, Treasury and Forex Management – ICSI

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Lesson 8- Working Capital – Financial, Treasury and Forex Management – ICSI

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Lesson 8 : Working Capital – Financial, Treasury and Forex Management – ICSI

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Lesson 8 : Working Capital – Financial, Treasury and Forex Management – ICSI

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Lesson 8 : Working Capital – Financial, Treasury and Forex Management – ICSI

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Lesson 8 : Working Capital – Financial, Treasury and Forex Management – ICSI