working_capital by hedongchenchen

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									Working capital
Different between Current assets and Current liability is called working capital. This is explain with help
of following example.




If from the above balance sheet current liability is deducted from the current assets what remain is
called Working capital e,g,. 15,000 (50,000 – 35,000).


Concept of working capital
         There are two concepts of working capital, firstly ‘Net working capital’ and secondly ‘Gross
working capital’ concept. Different between current Assets and Current liability is called ‘’Net working
capital’. In the above example this amount is 15,000. On the other hand, aggregate of current Assets is
called ‘’Gross working capital’’ that is 50,000 in the above example.




Factor affecting the requirement of
working Capital
Now in detail

   1) Nature of Business: The requirement of working capital depends upon the nature of business.
      The nature of business is usually of two types manufacturing Business and trading Business.
      a) In case of manufacturing business, raw material needs to be covert raw material into
          finished goods before any sales become possible. Consequently, more working capital is
          required.
      b) In case of Trading Business: A trading concern usually needs a smaller amount of working
          capital this because there is usually no processing.
   2) Scale of Operation: Need of working capital is depends upon the Scale of business. If business
      spread as large need large amount of working capital and vice versa.
   3) Business cycle: The need of working capital is affected by the business cycle. There is two
      aspects of business cycle:
      a) Boom period: during the boom period, the demand for the product increases and sale also
          increases. Therefore, more working capital is needed.
      b) Depreciation period: During the time of depreciation, the demand declines which stop the
          production. Therefore, less working capital is required.

   4) Seasonal factors: Most business has some seasonality in their operations. During ON season,
      due to large level of activities, large amount of working capital is required and vice versa.
   5) Production cycle: production cycle means, the time involved in converting the raw- material
      into finish goods. Longer this period, more working capital required and vice versa.
   6) Credit allowed: Those enterprises which sell goods on cash payment basis need little working
      capital and those who sells goods on credit basis need more working capital.
7) Credit availed: If raw material and other input are easily available on credit less working
   capital is required. And if these things are not available on credit basis then to make cash
   payment quickly large amount of working capital will be needed.
8) Availability of raw material: Availability of raw material also affects the amount of working
    capital requirement. If the enterprises makes use of such raw material which is available easily
    throughout the year, then less working capital is required because there will be no need to stock
    it in large quantity. On the other hand, If the enterprises makes use of such raw material which
    is not available easily throughout the year, then more working capital is required because there
    will be need to stock it in large quantity.
9) Growth prospects: There are two types of business from the point of growth: 1) such
    organization which have no possibility to growth, thus there is less need of working capital in
    future. 2) Such organization which have more possibility to growth thus they need more
    working capital in future.
10) Level of competition: High level of competition increases the need for more working capital.
    In order to face competition, more stock is required for the quick delivery and credit facility for
    the long period has to made available.
11) Inflation: inflation means increase in prices. In such situation more capital is required than
    before in order to maintain the previous scale of production and sales. Therefore, with the
    increasing rate of inflation, there is corresponding increase in the working capital.

12)

								
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