Thursday, 23 June 2011

Define Working Capital and explain the factors which determine the amount of working capital

Working Capital or Circular Capital or Floating Capital :-
Working capital is the amount of fund which is converted in current assets of a business. A firm needs capital to pay for its current expenses such as payment to employees, raw martial, bills gas, electricity and cash in hands. The working capital is converted into cash through the sale of product. The cash which is received, it is again used to cover the operating cost of a firm. The cash remains in circulation and it is called circulating capital. A sum working capital is required in that business where the turnover is repaid like retailing. On the other hand if the rate of turnover is slow like the business or furniture then a large quantity of working capital is needed.

Factors Affecting Working Capital :-
Following are the important factors which affect the working capital :

1. Scale of Business :-
If the scale of business is larger then more amount f working capital will be needed.

2. Nature of Business :-
The need of the working capital also depends upon the nature of business. In the seasonal industries working capital is required in large amount than others.

3. Risk Factors :-
Risky business requires greater need of working capital than the less risky business.

4. Cost of Production :-
If the cost of production is high than working capital is also required in large amount.

5. Purchase and Sale methods :-
If a firm purchases the raw materiel on credit and sells the product on cash then less amount of working capital will be required.

6. Turnover :-
If the turnover velocity of the working capital is greater then lesser amount of working capital is needed.

7. Inflation and Deflation Case :-
In case of rising prices less working capital is needed on the other hand in case of falling prices greater working capital is needed.

8. Time of Processing :-
If it takes longer time in manufacturing of the product then a greater amount of working capital is needed.

9. Quickly Sale-able Product :-
If the product is quickly sale-able for cash then the amount of working capital is needed. On the other hand greater amount will be needed.

10 Size of Labour :-
If a large number of workers are employed in any business then a large amount of working capital will be needed.


Jaspreet Kaur 27 April 2014 at 08:52  

nyc disscussion
bt there is a little mistake in 9 pt

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