Types of Working Capital
‧ Working capital can be classified with the help of the following two important concepts
- Gross Working Capital
- Net Working Capital
Gross Working Capital
‧ Gross Working Capital is the general concept which determines the working capital concept. Thus, the gross working capital is the capital invested in total current assets of the business concern.
‧ Gross Working Capital is simply called as the total current assets of the concern.
GWC = CA
Net Working Capital
‧ Net Working Capital is the specific concept, which, considers both current assets and current liability of the concern.
‧ Net Working Capital is the excess of current assets over the current liability of the concern during a particular period.
‧ If the current assets exceed the current liabilities it is said to be positive working capital; it is reverse, it is said to be Negative working capital.
NWC = CA – CL
Temporary Vs Variable Working Capital
Components of Working Capital
‧ Current Assets
These are those assets which change their form within a short period of time, generally within one year.
It includes-:Debtors, B/R, Cash & Bank balance, Prepaid expenses etc.
‧ Current Liabilities
These are those liabilities which are payable within a short period of time, generally within one year.
It includes-Creditors, B/P, Bank o/d, Short term loan, Proposed dividend etc.
Factors Determining Working Capital
- Nature of business
- Size of business
- Production process / cycle
- Requirement of cash
- Banking relations
- Business growth and expansion
- Profit margin
- Seasonal nature of business
- Current Assets requirements
- Manufacturing time
- Terms of Purchase & Sales
Sources of Working Capital Finance
FINANCING OF PERMANENT WORKING CAPITAL REQUIREMENTS
- Equity shares
- Preference shares
- Debentures/Bonds
- Retained earnings (or)Ploughing back of profits
- Term Loans from financial institution and banks
- Public deposits
FINANCING OF SESEASONAL/VARIABLE/TEMPORARY WCRS
- Trade credit, Cost of Trade credit
- Increase in price of goods
- Loss of good will/Credit worthiness
- Restriction in supply
- Cost of administration and accounting
- Bank Credit, Cash Credit
- Bank over draft, Loans
- Purchasing and Discounting of bills
- Commercial Paper
Methods of Estimating
1. Operating cycle method
2. Traditional or forecasting method
3. Projected balance sheet method
4. Profit and loss adjustment method
5. Sales forecasting method
Advantages of Working Capital
‧ It helps the business concern in maintaining the goodwill.
‧ It can arrange loans from banks and others on easy and favorable terms.
‧ It enables a concern to face business crisis in emergencies such as depression.
‧ It creates an environment of security, confidence, and over all efficiency in a business.
‧ It helps in maintaining solvency of the business.
Disadvantages of Working Capital
‧ Rate of return on investments also fall with the shortage of working capital.
‧ Excess working capital may result into over all inefficiency in organization.
‧ Excess working capital means idle funds which earn no profits.
‧ Inadequate working capital can not pay its short term liabilities in time.
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