Working Capital

Q.2. What do you mean by working capital. State its importance in business? Introduction
Adequacy of working capital rises the credit standing of the concern. Such a concern can buy goods on better terms and reduce the cost of production on account of receipt of cash discounts.
A concern is sure to fail, if there is no adequate supply of materials or cash. Nowadays production is carried on in anticipation of demand. There is a time between the point of supply of raw material and the ultimate realization of the sale proceeds of finished products. A large amount of working capital is required to keep the business moving continuously. Many new businesses are floated very well in the beginning but are unable to run properly usually because of inadequacy of working capital.
Kinds of Working Capital
Working capital a short term finance is of two types:
1. Initial Working Capital
It is the amount required to meet all current expenses the early development of business. This period may vary in different types of business according to their nature.
2. Regular Working Capital
It is the amount required after the business has been established as a going concern. The regular capital consists of two parts
(a) Fixed
(b) Variable
(a). Fixed Working Capital is the minimum amount of working capital required to carry on normal business operations. Every business has to maintain a minimum inventory of raw materials work in process, finished goods, etc. It always requires short term finance for making certain regular payments such as purchases, salaries, wages and rent etc.
(b). Variable Working Capital part of working capital is also known as seasonal or special working capital. It is the additional amount required during busy seasons on emergencies or under certain abnormal conditions such as in cases of rising prices, strikes and lock-out etc.
Factors Governing Short-Term Or Working Capital
1. Nature of Business
It is an important feature of determining the amount of working capital. Trading concerns requires large amount of working capital since their investment in current assets such as bills and book debts, etc., is more than that in fixed assets. Manufacturing units engaged in producing producer’s goods require lesser proportion of working capital. Public utilities like transport, electricity corporations, etc., need relatively little amount of working capital.
2. Size of Business
Small size business needs relatively large amount of working capital than a larger business.
3. Conversion of Working Capital
The speed with which working capital changes its form also affects the amount of working capital needed. If cash is converted into inventory into bills and books debts and bills into cash within a short time, the business can be managed with a small amount of working capital.
4. Turnover
Where there is a rapid turnover, it is possible to carry on business with comparatively limited amount of working capital.
5. Terms of Trade
A concern which makes purchases in on credit and sells for cash only, requires a smaller amount of working capital.
6. Cash Flow
When inflow of cash is greater than its outflow, a smaller amount of working capital is required.
7. Seasonal Variations
If the demand and/or supply are seasonal and widely fluctuate, more working capital is needed.
8. Absence of Coordination
The absence of coordination in the policies of production and distribution of goods may result in higher demand for working capital.
9. Transport Facilities
If means of transport facilities and communication available are not adequate and satisfactory the business concern is faced to maintain a large amount of stock of goods. This needs higher amount of working capital