WORKING CAPITAL

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Meaning of Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day-to-day operations. Capital required for a business can be classified under two main categories viz.

(i) Fixed capital

(ii) Working capital.

Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, Building etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent basis and is called fixed capital.

Funds are also needed for short-term purposes for purchase of raw materials, payment of wages and other day-to-day expenses etc. These funds are known as working capital which is also known as Revolving or circulating capital or short term capital. According to Shubin, “Working capital is amount of funds necessary to cover the cost of operating the enterprise”.

Working Capital = Current Assets – Current Liabilities

When current assets exceed the current liabilities the working capital is positive and negative working capital results when current liabilities are more than current assets. Examples of current liabilities are Bills Payable, Sunday debtors, accrued expenses, Bank Overdraft, Provision for Taxation etc. Net working capital is an accounting concept of working capital.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

1. Raw material
2. Work in process
3. Stores and spares
4. Finished goods
5. Temporary Investment of surplus funds.
6. Prepaid expenses
7. Accrued incomes.
8. Marketable securities.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.

The Need or Objects or Working Capital

The need for working capital arises due to time gap between production and realisation of cash from sales. There is an operating cycle involved in sales and realisation of cash. There are time gaps in purchase of raw materials and production, production and sales, and sales and realisation of cash. Thus, working capital is needed for following purposes.

 For purchase of raw materials, components and spares.

 To pay wages and salaries.

 To incur day-to-day expenses and overhead costs such as fuel, power etc.

 To meet selling costs as packing, advertisement.

 To provide credit facilities to customers.

 To maintain inventories of raw materials, work in progress, stores and spares and finished stock.

Working Capital Cycle :-

Cash Raw materialwork in progressFinished goods/stocksDebtors

The determination of WC helps in forecast, control& management of WC. The duration of WC may vary depending upon the nature of business. The duration of operating cycle (WC cycle) for the purpose of estimating WC is equal to the sum of duration of each of above events less the credit period allowed by the supplier.,

Working capital is a company’s short-term assets and liabilities. It is used to finance a company’s day-to-day operations, such as buying inventory, paying employees, and Marketing products.

There are two types of working capital: current assets and current liabilities. Current assets are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are liabilities that are due within one year, such as accounts payable and short-term debt.

Working capital management is the process of managing a company’s current assets and liabilities. The goal of working capital management is to ensure that the company has enough cash to meet its short-term obligations while also having enough assets to finance its operations.

There are a number of factors that affect working capital management, such as the company’s Industry, its business model, and its financial Health. The company’s industry can affect working capital management because different industries have different levels of inventory and receivables. For example, a company in the retail industry will have more inventory than a company in the service industry. The company’s business model can also affect working capital management. For example, a company that sells its products on credit will have more accounts receivable than a company that sells its products for cash. The company’s financial health can also affect working capital management. A company that is in financial difficulty may have difficulty meeting its short-term obligations.

There are a number of tools that can be used to manage working capital, such as the working capital cycle, the working capital ratio, and the working capital turnover ratio. The working capital cycle is the time it takes for a company to convert its inventory into cash. The working capital ratio is a measure of a company’s ability to meet its short-term obligations. The working capital turnover ratio is a measure of a company’s efficiency in using its working capital.

Working capital management is important because it can affect a company’s profitability and liquidity. A company that manages its working capital effectively can improve its profitability by reducing its costs and increasing its sales. A company that manages its working capital effectively can also improve its liquidity by ensuring that it has enough cash to meet its short-term obligations.

There are a number of risks associated with working capital management, such as the risk of inventory obsolescence, the risk of bad debts, and the risk of changes in interest rates. The risk of inventory obsolescence is the risk that a company’s inventory will become outdated and unsellable. The risk of bad debts is the risk that a company will not be able to collect its accounts receivable. The risk of changes in interest rates is the risk that a company’s interest expenses will increase if interest rates rise.

Working capital can be a source of value for a company. A company with a strong working capital position can use its working capital to finance its operations, invest in new projects, or return capital to shareholders.

In conclusion, working capital is a critical component of a company’s financial health. Working capital management is important because it can affect a company’s profitability and liquidity. There are a number of risks associated with working capital management, but working capital can also be a source of value for a company.

What is working capital?

Working capital is a measure of a company’s ability to meet its short-term financial obligations. It is calculated by subtracting current liabilities from current assets.

What are the components of working capital?

The components of working capital are current assets and current liabilities. Current assets are assets that are expected to be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are liabilities that are due within one year, such as accounts payable and short-term debt.

What is the importance of working capital?

Working capital is important because it is a measure of a company’s liquidity. A company with a high level of working capital is more likely to be able to meet its short-term financial obligations. This can help the company to avoid financial difficulties, such as bankruptcy.

What are some ways to improve working capital?

There are a number of ways to improve working capital, such as:

• Increasing sales: This will lead to an increase in accounts receivable, which is a current asset.
• Reducing costs: This will lead to a decrease in expenses, which is a current liability.
• Improving inventory management: This will lead to a decrease in inventory, which is a current asset.
• Extending payment terms to customers: This will lead to an increase in accounts receivable, which is a current asset.
• Negotiating better terms with suppliers: This will lead to a decrease in accounts payable, which is a current liability.

What are some risks associated with working capital?

There are a number of risks associated with working capital, such as:

• The risk of not being able to meet short-term financial obligations: This can lead to financial difficulties, such as bankruptcy.
• The risk of inventory obsolescence: This can occur when inventory is not sold in a timely manner and becomes worthless.
• The risk of bad debt: This can occur when customers do not pay their bills.
• The risk of changes in interest rates: This can affect the cost of borrowing Money, which can impact working capital.
• The risk of changes in the economy: This can affect sales and costs, which can impact working capital.

What are some tools and techniques that can be used to manage working capital?

There are a number of tools and techniques that can be used to manage working capital, such as:

• The cash conversion cycle: This is a measure of how long it takes a company to convert its inventory into cash.
• The days sales outstanding (DSO): This is a measure of how long it takes a company to collect its receivables.
• The days payable outstanding (DPO): This is a measure of how long it takes a company to pay its suppliers.
• The inventory turnover ratio: This is a measure of how often a company sells its inventory.
• The accounts receivable turnover ratio: This is a measure of how often a company collects its receivables.
• The accounts payable turnover ratio: This is a measure of how often a company pays its suppliers.

What are some best practices for managing working capital?

There are a number of best practices for managing working capital, such as:

• Monitor working capital closely: This will help to identify any potential problems early on.
• Set targets for working capital: This will help to ensure that working capital is managed effectively.
• Implement a working capital management system: This will help to track and manage working capital.
• Use working capital management tools and techniques: This will help to improve working capital management.
• Develop a working capital management plan: This will help to ensure that working capital is managed effectively in the long term.

1. Which of the following is not a component of working capital?
   (A) Current assets
   (B) Current liabilities
   (C) Long-term assets
   (D) Long-term liabilities

2. Which of the following is a measure of a company’s ability to meet its short-term obligations?
   (A) Current ratio
   (B) Quick ratio
   (C) Debt-to-Equity ratio
   (D) Return on equity

3. Which of the following is a measure of a company’s ability to generate cash from its operations?
   (A) Cash flow from operations
   (B) Cash flow from investing
   (C) Cash flow from financing
   (D) Net income

4. Which of the following is a measure of a company’s efficiency in managing its inventory?
   (A) Inventory turnover ratio
   (B) Days sales outstanding
   (C) Accounts receivable turnover ratio
   (D) Average collection period

5. Which of the following is a measure of a company’s efficiency in managing its accounts payable?
   (A) Accounts payable turnover ratio
   (B) Days payable outstanding
   (C) Average payment period
   (D) Inventory turnover ratio

6. Which of the following is a measure of a company’s overall liquidity?
   (A) Current ratio
   (B) Quick ratio
   (C) Debt-to-equity ratio
   (D) Return on equity

7. Which of the following is a measure of a company’s financial leverage?
   (A) Debt-to-equity ratio
   (B) Times interest earned ratio
   (C) Cash flow coverage ratio
   (D) Return on equity

8. Which of the following is a measure of a company’s profitability?
   (A) Net income
   (B) Return on assets
   (C) Return on equity
   (D) Earnings per share

9. Which of the following is a measure of a company’s Growth?
   (A) Sales growth
   (B) Earnings growth
   (C) Dividend growth
   (D) Book value growth

10. Which of the following is a measure of a company’s risk?
    (A) Beta
    (B) Standard deviation
    (C) Sharpe ratio
    (D) Sortino ratio