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Understanding of working capital

Uploaded by nkavithambassm on Apr 16, 2007

Understanding of working capital
By
N.Kavitha MBA,M.Phil,(Ph.D)
Lecturer- MBA,
SSM College of Engineering,
Komarapalyam. 638 183
Tamil nadu. India
nkavithamba@yahoo.co.in

Working capital :
Working capital may be regarded as the life blood of business. 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. Every business needs funds for two purposes.
 Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc
 Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is other wise known as revolving or circulating capital
It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset – Current Liability
Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it.



Importance of Adequate Working Capital

A business firm must maintain an adequate level of working capital in order to run its business smoothly. It is worthy to note that both excessive and inadequate working capital positions are harmful. Working capital is just like the heart of business. If it becomes weak, the business can hardly prosper and survive. No business can run successfully without an adequate amount of working capital.

Danger of inadequate working capital

When working capital is inadequate, a firm faces the following problems
Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient working capital. Low liquidity position may lead to liquidation of firm. When a firm is unable to meets its debts at maturity, there is an unsound position. Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not be able to get credit facilities. It may not be able to take advantages of cash discount.

Concept of working capital

1) Gross Working Capital = Total of Current Asset
2) Net Working Capital = Excess of Current Asset over Current Liability

Current Assets Current Liabilities
Cash in hand / at bank
Bills Receivable
Sundry Debtors
Short term loans
Investors/ stock
Temporary investment
Prepaid expenses
Accrued incomes Bills Payable
Sundry...

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Uploaded by:   nkavithambassm

Date:   04/16/2007

Category:   Accounting

Length:   10 pages (2,328 words)

Views:   8175

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