Notes On Working Capital:

       The term working capital literally means the amount of capital required for day to day activities of a business concern. However, the concept of working capital has been a matter of great controversies among the financial experts. The different concept of working capital has been classified into two broad groups:

1. Gross Concept:

       This concept refers to the firm's total investment in current assets. Current assets refer to the assets that can be converted into cash with the accounting period. Cash, inventories, debtors etc are some examples of current assets.

       In the opinion of J.S. Mill, "The sum of the current assets is the working capital of the business."

2. Net Concept:

       According to this concept, working capital refers to the difference between the current assets and the current liabilities. It is the excess of current assets over current liabilities. Current liabilities refer to the claims of the outsiders which need to be repaid within the accounting period. Creditors for goods, bills payable, bank overdraft etc are some of the examples of current liabilities.

       This concept can be expressed in the following equations

       Working Capital = Current Assets - Current Liabilities.

       To sum up, it can be concluded that working capital includes both - Management of Current Assets and Management of Current Liabilities.

Elements of Working Capital:

       The important elements of working capital are:

1. Inventories:

       It includes all investments and raw materials, work in progress, spare parts, finished goods. They constitute an important part of the current assets. There are many issues of inventory management which must be considered while deciding the minimum and maximum level of pricing policy, determining economic order quantity (EOQ) etc. the level of inventories must be just adequate to avoid the disadvantages of both inadequate and excessive inventories.

2. Receivables:

       Management of receivables is another important element of working capital. Liberal credit policy definitely increases sales but at the same time the quantum of Bad Debts, Collection Charges also gets increased. Similarly, strict credit policy will divert the customers towards the competitors.

       Hence, management needs to maintain a balance in their credit policy for efficient management of receivables.

3. Temporary Investment:

       Forecasting of cash will indicate whether the excess cash available is temporary or not. If it is found that the excess liquidity is temporary, cash should be invested in marketable but temporary investments. The interest earned on such investment even for a short period may be significant.

4. Cash:

       The management of cash is very important from the point of view of the firm. The firm must maintain adequate cash to meet its requirements and should avoid maintaining excess cash as it would only increase the cost of interest. As is well known idle money is no money. Thus the requirement of cash must be properly estimated with the help of the mechanism of cash budget.

5. Debtors:

       The management of debtors is another very important aspect of working capital. It involves making an analysis of the risks involved with the extension of credit facilities to the customers; following up the standing debtors and collection of credit amount form the sundry debtors.

Determinants of Working Capital:

       It is desirable for the companies to maintain a margin of current assets over current liabilities to enable it to meet the daily expenditures. This depends on many factors. The requirements of working capital primarily depends on the types of business, the requirements also vary from time to time

       Inorder to determine the working capital of the firm, the following factors should be carefully considered:

1. Production Cycle:

       The term "Production Cycle" refers to the span of time that is required to convert the raw materials into finished products. The lesser is the operating cycle, the lesser will be the amount of working capital requirement.

2. Terms of Purchase and Sale:

       The terms upon which the goods of the business are bought and sold also determines the amount of working capital requirement of the firm. If the business can procure raw materials on credit and sells the finished products for cash, it can run its business with a very little capital.

3. Nature and Volume of Business:

       The nature and volume of business also affects the working capital requirement of the firm. For E.g. public utility firms like transport, electricity etc requirement more fixed capital than working capital as compared with the manufacturing or trading concern.

4. Seasonal Variations:

Certain industries need to purchase raw materials at the season when it is available and have to utilize it throughout the year. For e.g. Jute, Wools etc.

5. Inflation and price Level Changes:

       Inflationary trend also affects the working capital of the firm in the sense that the price rise cannot be fully compensated with the selling price of the products.

6. Banking Connection:

       If a firm has tie up with the bank, it may maintain a minimum balance of working capital. But in the absence of such availability, a firm has to maintain a relatively larger amount of working capital.

7. Growth and Expansion:

       For normal growth rate of the firm, the retained earnings of the firm may provide the required amount of working capital. But for fast growing concern, the amount of working capital is much larger.

8. Realization from Sundry Debtors:

       The lesser the time spent between selling the product and the realization, the more will be the quicker inflation of cash. This will reduce the finance required for working capital purpose.

9. Nature of Product:

       If the cost of the raw materials is a large proportion of the total cost of the goods, working capital required will be very large.

       For e.g. sugar or textile industries requires large amount of working capital as raw materials requirements are of prime importance for these industries.

10. Importance of Labour:

       A labour intensive industry requires larger amount of working capital than an industries where there prevails greater degree of modern mechanism.