Definition of Working Capital" Working capital is an excess of current assets over current liabilities. In other words, The amount of current assets which is more than current liabilities is known as Working Capital. If current liabilities are nil then, working capital will equal to current assets. Working capital shows strength of business in short period of time . If a company have some amount in the form of working capital , it means Company have liquid assets, with this money company can face every crises position in market. "Formula of Calculating Working CapitalWorking Capital = Current Assets - Current LiabilitiesCurrent AssetsCurrent assets are those assets which can be converted into cash within One year or less then one year . In current assets, we includes cash, bank,debtors, bill receivables, prepaid expenses, outstanding incomes .Current LiabilitiesCurrent Liabilities are those liabilities which can be paid to respective parties within one year or less than one year at their maturity. In current liabilities, we includes creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses, advance incomes .Other names of Working CapitalSome Professional accountants know working capital as operating capital, operating liquidity, positive working capital.Important things about Working Capital1. Working Capital can be negative. At that time, We add one word " deficiency" in the back of working capital . It means if Current Liabilities are more than current assets, it is known as working capital deficiency or inverse working capital or negative working capital.2. Working capital can be easily adjusted, if Accounts manager knows different techniques of managing working capital . He can try to get short term loan or he can increase working capital by proper management of inventory and outstanding incomes and debtors .3. Working capital can also change by Changing in Cash Conversion period. Cash conversion period is a period in which company changes current assets into cash or bank.4. Working capital can also positive by increasing growth rate of company. If company does not invest more money and increase profit, the same amount will increase in the cash position of company and with cash company can increase their working capital position.Importance of Working CapitalSome time, If creditors demands their money from company, at this time company's high working capital saves company from this situation . You know that selling of current assets are easy in small period of time but Company can not sell their fixed assets with in small period of time. So, If Company have sufficient working capital , Company can easily pay off the creditors and create his reputation in market . But If a company have zero working capital and then company can not pay creditors in emergency time and either company becomes bankrupt or takes loan at higher rate of Interest . In both condition , it is very dangerous and always Company's Account Manager tries to keep some amount of working capital for creating goodwill in market .Positive working capital enables also to pay day to day expenses like wages, salaries, overheads and other operating expenses. Because sufficient working capital can not only pay maturity liabilities but also outstanding liabilities without any more delay.One of advantages of positive working capital that Company can do every risky work without any tension of self security.Concept of Working CapitalConcept of working capital includes meaning of working capital and its nature. Working capital is the investment in current assets. Without this investment, we can not operate our fixed assets properly. For getting good profits from fixed assets, we need to buy some current assets or pay some expenses or invest our money in current assets. For example, we keep some of cash which is the one of major part of working capital. At any time, our machines may need repair. Repair is revenue expense but without cash, we can not repair our machines and without machines, our production may delay. Like this, we need inventory or to invest in debtors and other short term securities.On the basis of Concept, we can divide our working capital into two parts:

1. Gross Working CapitalIn this concept of working capital, we study gross working capital. We do not deduct current liabilities in this concept but we use current liabilities as source of fund. Suppose, if we buy goods on credit, it means our save our cash and we can use this as working capital for paying other expenses.2. Net Working CapitalUnder this concept we use net working capital. For this, we first deduct all our current liabilities from our current assets. Excess of current assets over current liabilities will be current assets. We have to maintain minimum level of working capital in our business for operation of business activities. This concept is also used for preparation of balance sheet. In the vertical form of balance sheet, we show excess of current assets over current liabilities.Operating Cycle Concept of Working CapitalIn this concept of working capital, we make the operating cycle. In this cycle, we calculate inventory conversion period. To know this, we can estimate when we need cash for buying our inventory. We also calculatedebtoror receivableconversionperiod. To know this, we can estimate when we receive cash from our debtors.If inventoryconversionperiod is less than debtor conversion period, we have to manage other sources for buying our inventories. If we buy good on credit, we also take care creditors' conversion period.Optimal Level of Working CapitalOptimal level ofworking capitalis that level where company is capable to pay day to day expenses and company has enough cash to buy the stocks in case if it does not receive money fromdebtorson the time. This level is achieved by thinking and using the techniques ofworking capital management. We all know that both low level or over level of working capital is harmful for development of business. If company has not enough cash to repay its liability, it will create the risk ofsolvencyandliquidityand company may go for liquidation. In case, company has over working capital, it will be misuse of money because that money is not gaining any earning and its opportunity cost will suffer byshareholdersand ultimately it will decrease the value of share in share market. So, as finance manager, you should try to create equilibrium or optimal or optimum level of working capital.

Working Capital ForecastsWorking capital forecasts means to estimate the value of working capital in one year. Following are main items which are estimated in working capital forecasts. 1.Future Operating Costs: We estimated our future operating cost, more future operating cost means more need of cash and cash is the part of working capital. It means, we need more working capital in that situation. For estimating this, w analyze past income statements of company. 2. Forecast Revenue Growth: By sales and other revenue's trend analysis, we can forecast revenue growth. This will tell us, how will working capital manage from revenue in future. 3. Changes of Working Capital: To analyze the past working capital changes is useful for working capital future forecast. Working capital is difference between current assets and current liabilities. If we check two years' working capital changes, we can estimate what changes in working capital in next year.

Determinants of Working Capital

1. Small or Large Business: It is the first determinant of working capital that it is affected with the nature of business. Business may be small or large. In small business, company need high working capital because, small business is relating to trading of goods, for starting small business, you need very small fixed capital but need high working capital for paying day to day expenses. But in large business, we require more fixed capital than working capital for purchasing fixed asset.2. Small or Large Demand: Nature of demand also absolutely affects the working capital need. Some product can be easily sold by businessman, in that business; you need small amount of working capital because your earned money from sale can easy fulfill the shortage of working capital. But, if demand is very less, it is required that you have to invest large amount of working capital because your all fixed expenses must be paid by you. For paying fixed capital you need working capital.3. Production Policy: Production policy is also main determinant of working capital requirement. Different company may different production policy. Some companies stop or decrease the production level in off seasons, in that time, company may also reduce the number of employees or decrease the purchasing of new raw material, so, it will certainly decrease the amount of working capital but on the side, some company may continue their productions in off season, in that case, they need definitely large amount of working capital.4. Credit Policy: Credit policy is relating to purchasing and selling of goods on credit basis. If companypurchasesall goods on credit and sells on cash basis or advance basis, then it is certainly company need very low amount of working capital. But if in company, goods are purchased on cash basis, and sold on credit basis, it means, our earned money will receive after sometime and we require large amount of working capital for continuing our business.5. Dividend Policy: Dividend policy also effect working capital requirement. Company can distribute major part of net profit. But, if there is no reserve, we have to invest large amount in working capital because, lacking of reserve will affect on adversely on fulfill our liabilities. In that case, we have to yield working capital by taking short term loan for paying uncertain liability.6. Working Capital Cycle: Working capital cycle shows all steps which starts from cash purchasing of raw material and then this converted into finished product, after this it is converted into sale, if it is credit sale,debtorswill also the part of working capital cycle and when we gets money from our debtors, it is the final part of working capital cycle. If we receive fastly from our debtors, we need small amount working capital. Otherwise, for purchasing new raw material, we need more amount of working capital.7. Manufacturing Cycle: Manufacturing cycle means the process of converting raw material into finished product. Long manufacturing cycle will create the situation in which we require large amount of working capital. Suppose, we have to construct the building, for constructing colony of buildings, it mayconsume the time more than5 years, so according to this we need working capital.8. Business Cycle: There are two main part of business cycle, one is boom and other is recession. In boom, we need high money or working capitalfor development of business but in recession, we need only low amount of working capital.9. Price Level Changes: If there is increasing trend of products prices, we need to store high amount of working capital, because next time, it is precisely that we have to pay more for purchasing raw material or other service expenses. Inflation and deflation are two major factors which decide the next level of working capital in business.10. Effect of External Business Environmental Factors: There are many external business environmental factors which affect the need of working capital like fiscal policy, monetary policy and bank policies and facilities.

Working Capital ManagementIntroduction of Working Capital ManagementWorking capitalmanagement is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool forfund flow analysis. Working capital is very significant for paying day to day expenses and long term liabilities.Meaning and Concept of Working Capital and its managementWorking capital is that part ofcompanys capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested yourmoneyto purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that iscash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities.Types of Working Capital1. Gross working capital: Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital.2. Net Working Capital: Net working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current Assets Total Current LiabilitiesThis amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long termdebtsat any time.3. Permanent Working Capital: Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business.4. Temporary Working Capital: Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we dont need such capital.In working capital management, we analyze following three pointsIst PointWhat is the need for working capital? After study the nature of production, we can estimate the need for working capital. If company produces products at large scale and continues producing goods, then company needs high amount of working capital.2nd PointWhat is optimum level of Working capital in business?Have you achieved the optimum level of working capital which has invested in current assets? Because high amount of working capital will decrease thereturnoninvestmentand low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. For achieving optimum level of working capital, finance manager should also study the factors which affects the requirement of working capital and different elements of current assets. If he will manage cash,debtorand inventory, then working capital will automatically optimize.3rd PointWhat are main Working capital policies of businesses?Policies are the guidelines which are helpful to direct business. Finance manager can also make working capital policies.1st Working capital policyLiquidity policyUnder this policy, finance manager will increase the amount of liquidity for reducing the risk of business. If business has high volume of cash andbankbalance, then business can easily pays his dues at maturity. But finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So liquidity policy should be optimized.2nd Working Capital PolicyProfitability policyUnder this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because liquidity of business will decrease and it can create bankruptcy position of business. So, profitability policy should make after seeing liquidity policy and after this both policies will helpful for proper management of working capital.Management of CashInfinancial management, management of cash can easily effect on your working capital optimization. If management of cash is not good, you will not succeed to manage your working capital. So, you should understand about the meaning of management of cash.Meaning of management of cashCash is most liquid asset just like petrol. So, it is very easy that someone can take it from your control. Management of cash teaches us to control cash in such a way thati) No one can take it without our permission.ii) It is enough for operation of company.iii) Better system of collection and payment of cashManagement of Cash is the function of treasury department of company. Following are main things which are required for proper management of cash:1. Bank ReconciliationThese days, all business deals are completed with banks. Your so many cheques go to bank for collection and so manychequesare issued to other parties. But, you cash book does not match with your bank statements. For proper cash management, you should learn bank reconciliation. It means to take care the reasons of not matching cash book with bank statements. You can learn it athere.2. Management of Online CashYour business may be fast online just like e-bay or Amazon. All these sites provide you secure payment section for buying products. But, their treasury department has to do hard work to manage online cash. All online cash is watched by treasury experts.3. ATM TransferEven ATM transfer can be found from bank statements. But special care of ATM transfer will be helpful to your for better management. Company's officer may use ATM transfer for paying money tooverseasemployees. So, treasury audit officer should check whether it is issued to proper employee by proper authority.4. Proper Transfer of Store or department cashIf there are large number of stores of your company, at that time, proper transfer of store cash to head office is very necessary. Only use single bank account for all stores is not good technique. Use different bank account for different store or department. When the transfer the money to that bank account, it can be tracked. After all different bankstransferto main bank account.EXCESSIVE AND INADEQUATE WORKING CAPITAL:A business enterprise should maintain adequate working capital according to the needs of its business operations. The amount of working capital should neither be excessive nor inadequate. If the working capital is in excess if its requirements it means idle funds adding to the cost of capital but which earn nom profits for the firm.On the contrary, if the working capital is short of its requirements, it will result in production interruptions and reduction of sales and, in turn, will affect the profitability of the business adversely.Disadvantage of Excessive Working Capital:-(1) Excessive Inventory:-Excessive working capital results in unnecessary accumulation of large inventory. It increases the chances of misuse, waste, theft etc.(2) Excessive Debtors:-Excessive working capital will resultsinliberalcreditpolicy which, in turn, will results in higher amount tied up in debtors and higher incidence of bad debts.(3) Adverse Effect on Profitability:-Excessive working capital means idle funds in the business which adds to the cost of capital but earns no profits for the firm. Hence it has a bad effect on profitability of the firm.(4) Inefficiency of Management:-Management becomes careless due to excessive resources at their command.It results in laxity of control on expenses and cash resources.Disadvantage of Inadequate Working Capital:(1) Difficulty in Availability of Raw-Material:-Adequacy of working capital results in non-payment of creditors on time.As a result the credit purchase of goods on favorable terms becomes increasingly difficult. Also, the firm cannot avail the cash discount.(2) Full Utilization of Fixed Assets not Possible:Due to the frequent interruption in the supply of raw materials and paucity of stock, the firm cannot make full utilization of its machines etc.(3) DifficultyintheMaintenanceofMachinery:Duetotheinadequacyofworking capital, machines are not cared and maintained properly which results in the closure of production on many occasions.(4) Decrease in Credit Rating:Because of inadequacy of working capital, firm is unable to pay its short-term obligations on time. It decays the firm's relations with its bankers and it becomes difficult for the firm to borrow in case of need.(5) Non Utilization of Favorable Opportunities:For example, a firm cannot purchase sufficient quantity of raw materials in case of sudden decrease in the prices. Similarly, if the firm receives a big order, it cannot execute it due to shortage of working capital.(6) DecreaseinSales:Duetotheshortageofworkingcapital,thefirmcannotkeep sufficient stock of finished goods. It results in the decrease in sales. Also, the firm will be forced to restrict its credit sales. This will further reduce the sales.(7) Difficulty in the Distribution of Dividends:Because of paucity of cash resources, firm will not be able to pay the dividend to its shareholders.(8) Decrease in the Efficiency of Management:It will become increasingly difficult for the management to pay its creditors on time and pay its day-to-day expenses. It will also be difficult to pay the wages regularly which willhave an adverse effecton the morale of managers.