Working capital means a revolving fund, it’s an amount required for day to day operations of a business. We can say that it is cash generated from sales and used to cover the cost of ongoing current operations.
For example: In a manufacturing unit the conversion of cash is done into raw material, raw materials into work in progress, work in progress into finished goods, finished goods into receivables and receivables into cash it’s an operating cycle.
An adequate amount of working capital is very much necessary for:
- Paying creditors on time, and clearing dues on time ensures less liabilities on company.
- Adequate working capital enables the business to pay salaries, meet their expenses on time, flow of production distribution remains smooth. If working capital becomes inadequate it will cease the working of a business.
- Easily availability of loans from banks and financial institutions, a business with good working capital has high credit worthiness.
- Good business opportunities, a business having sufficient amount of working capital is more competitive and has a strong position in the market.
- A good working capital improves the sense of safety and confidence in employees as they get the wages and salaries on time.
- Timely payment of dividend to shareholders as non payment of same may cause company to lose its reputation.
So, working capital requirement depends upon size, nature, turnover and many other factors according to which the company should plan it’s working.
