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Working Capital

“Working capital is relatively liquid (which can be converted into cash) portion of the total capital of the business. It is required for investment in current assets like cash, stock of materials and finished goods, debtors, etc.”

Working capital is that portion of capital which is required for holding current assets like stock of materials and finished goods, bills receivable, accounts receivable and cash for meeting current expenses like salaries, wages, taxes, rent, etc.

The term ‘working capital’ is used in two senses, namely, gross working capital and net working capital. Gross working capital denotes the total investment in current assets and net working capital represents the excess of current payable and expenses payable. It s the concept of net working capital is more relevant for the purpose of determining the amount of working capital required.

Operating Cycle of Working Capital

The working capital of a business keeps on circulating. For instance, cash is used buy raw materials which are converted into work-in-process and finished goods. The finished goods may be sold in cash and the circle will be completed. If goods are sold on credit basis, debtors (or accounts receivable) are created which will result into cash later.

Operating Cycle of Working Capital

Adequate working capital is essential for the smooth running of any business.

An industrial organization needs capital for the following purposes:
(i)    To buy raw materials to produce finished goods.
(ii)    To pay wages and salaries of labour, clerical staff, etc.
(iii)   To meet the overhead costs (other than wages and salaries) including those of maintenance, service activities, fuel, power charges, taxes and general expenses of administration.
(iv)    To meet expenses on sales such as expenses on packaging, advertisement, commission t dealers, salaries, bonus and commission to sales force, freight, etc.

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