Meaning: -There is no universally accepted definition of working
capital. Various financial experts used this tern in different ways. Some
explain it in a narrow sense while some in a wide sense. In the narrow sense,
it is the "difference between current assets and current liabilities".
Definition: -" The excess of current assets over current
liabilities". (Defined by......Gerstenbergh)
Factors affecting
requirement of Working Capital:
1. Nature
of business: -The working capital requirements are highly influenced
by the nature of business
2. Size
of business: -The size of business also affects the requirement of
working capital. Size of the firm maybe estimated in terms of scale of
operation. A firm with large scale operation will require more working capital.
3.
Volume of cycle:
-This
is the most important factor affecting size of working capital. The volume of
sale and the size of working capital are directly related with each other. If
the volume of sales increases, there is an increase in amount of working
capital.
4.
Production cycle:
-The
process of converting raw material into finished goods is called 'Production Cycle'. If the production
cycle period is longer, the firm needs more amount of working capital. If the
manufacturing cycle is short, it requires less working capital.
5. Business
cycle: -When
there is upward-swing in economy, sales will increase. This will lead to
increase in investment in stock. This act will require additional working
capital. During recession(decline) period, sales will decline and consequently
the need of working capital will also decrease.
6. Terms
of purchase and sale: -If credit terms of purchase are favourable and terms of
sales are less liberal, then requirement of cash will be less. Thus working
capital requirement will be reduced. A firm gets more time for payment to
suppliers. A firm which enjoys more credit facilities needs less working
capital.
7. Credit
control: -Credit control includes the factors such as volume of credit
sales, the terms of credit sales, the collection policy, etc. if credit control
policy is sound; it is possible for the company to improve its cash flow.
8. Growth
and expansion: -The working capital requirement of a firm will increase
with growth of firm. The growth of firm is in terms of sales or even fixed
assets. A growing company needs funds continuously to support large scale
operation.
9. Management
ability: -The requirement of working capital is reduced if there is proper
co-ordination in production and distribution of goods. A firm stocking on heavy
inventory calls for higher level of working capital.
