1. Working Capital:
Working capital is that portion of capital required for investing in current assets for meeting day to day working of an organization. Current assets can be converted into cash within a period of one year. They provide liquidity to the business.
2. Working capital is of two types:
- Gross working capital = Total of current asset
- Networking capital = Current assets – Current Liabilities
Factors affecting Working Capital:
1. Nature of Business: A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation.
2. Scale of Operations: A large scale organisation requires large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: In the boom period larger amount of working capital is needed to meet the demand. In case of depression, demand for goods declines so less working capital is required.
4. Seasonal Factors: During peak season demand of a product will be high and thus high working capital will be required as compared to the lean season.
5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.
6. Credit Policy: A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.
7. Operating Efficiency: If cash, debtors and inventory are efficiently managed, working capital requirement can be reduced.
8. Availability of Raw Materials: If the raw materials are easily available in the market and there is no shortage, huge amount need not be blocked in inventories, so it needs less working capital.
