In case of newly started business: ”The amount that remains in the hands for the working of the business after the necessary fixed assets have been purchased is called Working Capital for the newly started business.”
In case of an established business: Working capital is defined for an already estab1ished business. “The excess of current assets over current liabilities.
It may be stated in the equation
Current assets-Current Liabilities = Working Capital. The amount of working capital is invested -in current assets like stock of raw materials, finished and semi- finished products, bills receivable, debtors and saleable securities etc.
Sources of working capital
The following are the main sources of working capital:
(a) Issue of share or debentures.
(b) Managing Agents.
(c) Reduction of losses, expenditure and wasting.
(d) Loans from internal and external sources.
(e) Incorporate Saving.
(f) Public Deposit.
(g) Disposed of fixed assets.
The following are the basic guiding factors which determine the amount of the working capital.
Basis of sales and period of credit sales
Basis of sale and period of credit sale will determine the amount of working capital. If business operates on cash basis, it will require less working capital. If it operates on credit basis, it will need more working capital. On the other hand shorter the period of credit sale, the lesser the need for working capital.
Basis of purchase and payment period
If raw material and other necessities are purchased on cash basis, it will require larger working capital. If the period of credit purchase is larger it will need smaller working capital.
The greater the velocity in the turnover of working capital, the lesser the amount of working capital is needed.
Cost of Manufacture
Greater the cost of production of goods, greater is the amount of working capital required such as in heavy industry.
Time consumed in manufacture
Longer the time required in manufacturing of the product, the greater the working capital needed to carry the business over that period, such as in shipping industry and aircraft industry.
The business cycle
During period of boom lesser amount of working capital is called than to period of depression. In other words during the period of rising prices, the business will need greater working capital than to period of falling prices.
Scale of business
The larger the scale of business the more amount of working capital is required for the business and vice versa.
Risk of business
Risky enterprises require the greater need of working capital. Lesser hazards enterprises call lesser amount of working capital.
Method of payment
If the payments for variable and nominal expenses are made after some period, the lesser amount of working capital is needed than prompt payment.
Convertibility working assets into cash
A business with large amount of quick or liquid working assets require less amount of working capital. On the other hand, if the firm has lesser liquid working assets, greater working capital will be needed.
Nature of business
The requirements of the working capital differ from business to business. For example in seasonal industries as cotton, sugar, there will be comparatively large requirement of working capital. In case of unseasonal industries, less amount of working would be needed.