"Working Capital"

*   Introduction :

                       Every organisation commercial as well as non-commercial requires some amount of fixed capital for procurement of fixed assets viz. land and building, plant and machinery, furniture's and fixtures, vehicles etc. In addition to fixed capital an organisation requires additional capital for financing day to day activities. Such capital which is required for financing day to day activities is called as working capital. Working capital is required for smooth conduct of business activities. It is the working capital which decides success or failure of an organisation. It is the life blood of an organisation.

                      Shortage of working capital has always been the biggest cause of business failure. Lack of considerable foresight in planning working capital needs of the business has forced even profitable business entities, the so called 'blue-chip' companies, to the brink of insolvency.

                      Working capital is the warm blood passing through the arteries and veins of the business and sets it ticking. New firms wind up for want of working capital. Even gains tumble like pack of cards through the drying up of working capital reservoirs. 

                      Liquidity & profitability are the two aspects of paramount importance in a business. Liquidity depends on the profitability of business activities and profitability is hard to achieve without sufficient liquid resources. both these aspects are closely inter-related. 

                     In this chapter, we shall study the vital aspects such as concepts of working capital, its importance in business activities and decision-making process and calculation of required working capital with practical illustrations.

*   Definitions :

                    Working Capital, like many other financial and accounting terms, has been used by different people in different senses.

                    One school of thought believes, as all capital resources available to a business organisation - from shareholders. bondholders, and creditors (secured and unsecured) - 'works' up in the business activities to generate revenues and facilitate future expansion and growth, they are to be considered as 'working capital'.

                  Hoagland defines working capital as follows :

                  "Working Capital is descriptive of that capital which is not fixed. But, the more common use of working capital is to consider it as the difference between the book calue of the current assets and the current liabilities."

                  Gerestenberg defines working capital as follows:

                  "Circulating Capital means current assets of a company that are changed in the ordinary course of business from one to another, as for example, from cash to inventories, inventories to receivables and receivables to cash."