Working capital finance

What is working capital finance?

Working capital finance is defined as the capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. For many companies, this is wholly comprised of trade debtors (that is, bills outstanding) and trade creditors (bills the company in question has yet to pay). There are a number of short term and long term sources of working capital financing.

Working capital Defined as the difference between current assets and current liabilities. There are some variations in how working capital is calculated. Variations include the treatment of short-term debt. In addition, current assets may or may not include cash and cash equivalents, depending on the company. Copyright 2012, Campbell R. Harvey. All Rights Reserved.

Working Capital The amount of money a company has on hand, or will have, in a given year. Working capital is calculated by subtracting current liabilities from current assets. That is, one takes the value of all debts and obligations for the current year and subtracts that from the value of all cash and assets that might reasonably be converted into cash in the current year. This is a good measure of the short and medium-term financial health of a company, and may indicate by how much it can expand its operations without resorting to borrowing or another capital raising tactic. Working capital is also called operating assets or net current assets. Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

working capital The amount of current assets that is in excess of current liabilities. Working capital is frequently used to measure a firm's ability to meet current obligations. A high level of working capital indicates significant liquidity. Also called net current assets, net working capital. See also current ratio, quick ratio. Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved.

Working capital. Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations humming. One way to evaluate working capital is the extent to which current assets, which can be readily turned into cash, exceed current liabilities, which must be paid within one year.

Some working capital is provided by earnings, but corporations can also get infusions of working capital by borrowing money, issuing bonds, and selling stock. Dictionary of Financial Terms. Copyright 2008 Lightbulb Press, Inc. All Rights Reserved.

working capital

The difference between cash and other quick assets (current assets) and current liabilities. The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright 2007 by The McGraw-Hill Companies, Inc.

Working Capital

What Does Working Capital Mean? A measure of a company's efficiency and short-term financial health; a company's working capital is calculated as shown here: Positive working capital means that the company is able to pay off its short-term liabilities, whereas negative working capital means that a company is unable to meet its short-term liabilities out of its current assets (cash, accounts receivable, and inventory). Working capital also is referred to as net working capital. Investopedia explains Working Capital

If a company's current liabilities exceed its current assets, it may have trouble paying back its creditors in the short term. The worstcase scenario is bankruptcy. A declining working capital over a longer period should be a red flag to investors. For example, it could signal a decrease in a company's sales, and as a result, its accounts receivable (future cash flow) will shrink, meaning that future cash flows will be reduced. Working capital also reveals a company's operational efficiency. Money that is tied up in inventory or money that customers still owe (accounts receivable) cannot be used to pay off any of the company's current obligations. Therefore, if a company is not operating in the most efficient manner (slow collection), that will show up as an increase in working capital. This efficiency can be deduced by comparing working capital from one period to another; slow collection may signal an underlying problem in the company's operations

Working Capital for your Business

What Is Working Capital? The textbook definition of working capital is: current assets minus current liabilities. In laymans terms working capital is the amount of money that a company has to expand, purchase inventory, or buy equipment. Working capital can be positive or negative depending on how much debt a company carries. Generally speaking, a business with more working capital will be more successful because it will be able to improve its operations and expand when competitors with less or no working capital wont.

Working capital
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Q- DETERMINANTS OF WORKING CAPITAL

There are lots of factor of determinants of working capital 1) Nature of business - working capital requirement of a firm basically influenced by the nature of its business trading and financial forms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retails stores, for example must carry large stock of a verity of good to satisfy varied and continuous demand of their customer. 2) Market and demand condition - the working company related to its sales . it is difficult to precisely determine the relationship between the volume of sales and working capital need. Current assets will have to be employed before growth takes place. Then necessary to make planning of working capital for a growing firm on a continuous basis 3) Technology and manufacturing policy - the manufacturing cycle comprise of the purchase and use of raw material and the production of finished goods. Longer the manufacture cycle, larger will be the firm's working capital requirement. For example, the manufacturing cycle in the case of a boiler, depending on its size, may range between six to twenty four month. On the other hand the manufacturing cycle of product such as detergent powder, soap, ice creams etc. may be a few hour extend product take a large time

4) Credit policyof the firm affect the working capital by influencing the level of debtor. The credit term to be guaranteed to customer may depend upon the norm of the industry to which the firm belong. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practice. The firm should use discretion in granting credit term to us customer 5) Operating efficiency - the operating efficiency of the firm relates to the optimum utilization of all its resource at minimum costs. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization improves profitability and helps the releasing on working capital 6) Conditions of supply: the inventory of raw material, spares and stores depends on the conditions of supply. if the supply is prompt and adequate, the firm can manage with small inventory. however, if the supply is unpredictable and scant then the firm, to ensure continuity of production, a similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year

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Working Capital Finance Overview Needless to say that every Small and Medium Enterprise wants to become big but often finds itself in unexpected financial crunch and working capital is the most critical of them. Without adequate working capital it can not build enough inventory or purchase raw material. As a result the company can not sell enough products to generate the profit to expand further. To avoid this you need to plan in advance, for the working capital needs of your Small and Medium Enterprise. With a strong working capital base you can fulfill the needs of your business as well as your target market. Your business can rise to the unforeseen challenges of today's highly competitive and changing business environment. You can concentrate on, expanding your business, finding newer business opportunities, utilizing your available funds to other more productive activities. Today many innovative companies have come up with hassle free working capital finance program, with minimal securities, sometime even without security. For all this you just need to broaden your view in terms of finding the best

innovative solution offered, and need to explore all the options available in the market for the unique needs of your enterprise. The most important aspect of working capital is that: A business which is in financial trouble needs Working Capital Finance to pull it out of this situation thus It is in a great need of Working Capital Finance. But a business which is doing so well and expanding further, is in greater need of Working Capital Finance since it has to produce more and more products to keep the momentum going. So in both the conditions Working Capital Finance planning becomes imperative for any enterprise.

Working Capital Finance Benefits

It brings instant finance for the business. Protects the business against any unforeseen future challenges. Working capital finance gives strength, flexibility and stability to the business. With adequate working capital finance, other available funds can be utilized in other productive activities thus enabling the enterprise to realize its full potential. Working capital finance can be extremely useful when a business is experiencing financial troubles, it can provide instant finance and pull it out of trouble situations.

Working Capital Finance

Working capital, also known as net working capital or NWC, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It

is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Working Capital = Current Assets Current Liabilities
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

Working capital loans are tailored to suit the precise requirements of the client, in any of the various instruments available or structured as a combination of cash credit, demand loan, bill financing and non-funded facilities. Our accomplished credit crew can gauge the credit needs of each client and frame the exact solutions.

Our dedicated credit team has a deep understanding of the intricacies of various industries and is richly experienced in reckoning the business potential of companies. These informed professionals can assess your specific credit requirements and tailor customized financial solutions to suit your risk profile and the working capital cycle of your company. Normally working capital finance is extended as a limit for various facilities for tenors up to one year. The loans normally carry on a floating interest rate linked to prime lending rate (PLR) for working capital finance. Working capital finance limits are normally valid for one year and repayable on demand.

Factors Affecting working Capital needs

by V S Rama Rao on February 7, 2009 A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors. 1. Nature of business 2. Seasonality of operations 3. Production cycle 4. Production policy 5. Credit Policy 6. Market conditions 7. Conditions of supply Nature of Business: The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exists no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower. Seasonality of Operations: If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low. Production Cycle: The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa. Production Policy: The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., The production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season. Credit Policy:

The level of the working capital is also determined by the credit policy, as the firms credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the companys credit policy does not allow it to extend credit to the buyers. Market Conditions: The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements. Conditions of Supply: The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of working capital.

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The working capital requirements of a business depends upon a number of factors which in brief are as under: (1) Nature of the business.The working capital requirements of an enterprise basically depends upon the nature of its business and operating cycle of the business. A trading concern, for instance, requires large amount of working capital for investment in stocks, receivables and cash etc. It requires less investments in fixed assets. A business where the proportion of cost of raw material to be consumed to total cost of production is high, the amount of working capital required is large, shipbuilding for instance. (2) Size of the business.The amount of working capital needed depends upon the scale of operation of the business. The larger the size of the business unit, generally the larger is the requirement of working capital and vice versa. (3) Length of period of manufacture.If the goods are tied up for a longer period of time in. the production process such as ship building, heavy armaments, aeroplanes etc., it requires a large amount of working capital to meet the manufacturing expenses until the payment is received for the finished products. In case of short manufacturing process of a commodity such as cloth, shoes etc. the capital is not tied for a longer period and as such the amount of circulating capital will be small compared to the ship building industry. (4) Methods of purchase and sale of commodities.If a business is able to purchase the raw material and other allied products on credit and is able to sell the manufactured goods on cash it will need less amount of working capital In case the raw material is purchased on cash and goods are sold on credit the amount of required working capital would be large.

(5) Converting working assets into cash.If the assets of a business have liquidity i.e. they are readily saleable for cash then less amount will be set aside for working capital. In case the assets are not quickly saleable for cash then a greater amount f working capital will be required by it. (6) Seasonal variation in business.There are certain industries which purchase raw material in the production season such as cotton, rubber and consume the material in the off season for the manufacturing of products. These industries require large amount of working capital to purchase the raw material in a production season and pay the wage costs in the off season. (7) Risk in business.A business like the oil exploration involves great risk. The business may or may not be able to find out the oil by digging of wells: The business needs huge amount of working capital in such risky enterprises. (8) Size of labour force.If the size of labour force employed in the manufacture of a product is fairly, large, (labour intensive), the business will need a greater amount of working capital. In capital intensive industries lesser amount of working capital is required. (9) Price level changes.If the prices are rising very rapidly in the country the business will require greater amount of working capital to maintain the same current assets and vice versa. (10) Rate of turnover.If in a business, the sale is faster i.e., a business has rapid turn over then the amount of working capital required may be small as cash is realized from sales. A business where the rate of turn over is slow there is more requirement of working capital in that business. (11) State of business activity.When the business is prosperous it needs more working capital for increasing the volume of business. On the contrary when the business is slack and sales decline then less amount of working capital is required. (12) Business policy.If a business sets aside funds at the end of each year for the depreciation, payment of loans and ploughing back of profits in the business, it requires less amount of working capital. On the other hand, .a business which does not build its own internal resources, needs larger amount of working capital to meet the day today expenses of the business and other unexpected expenses.

Factor affecting working capital?

Answer:

he working capital needs of a firm are influenced by numerous factors. The important ones are i) Nature of business: The working capital requirement of a firm is closely related to the nature of business . A service firm , like electricity undertaking or a transport corporation which has a short operating cycle and which sells predominantly on cash basis , has a modest working capital requirement . On the other hand , manufacturing concern like a machine tools unit , which has a long operating cycle and which sells largely on credit has a very substantial working capital requirement . ii) Seasonality of Operation : Firms which have marked seasonality in there operations usually have highly fluctuating working capital requirement. For example , consider a firm manufacturing air conditioners . The sale of air conditioners reaches the peak during summer months and drops sharply during winter season . The working capital need of such a firm is likely to increase considerably in summer months and decrease significantly during winter period . On the other hand , a firm manufacturing consumer goods like soaps , oil , tooth pastes etc. which have fairly even sale round the year , tends to have a stable working capital need . iii) Production Policy: A firm marked by pronounced seasonal fluctuation in its sale may pursue a production policy which may reduce the sharp variations in working capital requirements. For example a manufacturer of air conditioners may maintain steady production through out the year rather than intensify the production activity during the peak business season. Such decision may dampen the fluctuations in working capital requirements. iv) Market Conditions: When competition is keen, larger inventory of finished goods is required to promptly serve the customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further generous credit terms may have to be offered to attract customers in highly competitive market . Thus , working capital needs tend to be high because of greater investment in finished goods inventory and accounts receivable . If the market is strong and competition is weak , a firm can manage with smaller inventory of finished goods because customers can be served with delay . Further in such situation the firm can insist on cash payment and avoid lock up of funds in accounts receivables - it can even ask for advance payment , partial or total . v) Conditions of Supply: The inventory of raw material, spares and stores depends on the conditions of supply. If supply is prompt and adequate, the firm can manage with small inventories. However if the supply is unpredictable and scant then the firm , to ensure continuity of production , would have to acquire stocks as and when they are available and carry large inventories on an average . A similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year

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What Are The Factors Which Can Affect Working Capital?

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5 FACTORS AFFECTING THE COMPOSTITION OF WORKING CAPITAL The factors affecting the Composition of Working Capital are:1. Nature of Business Different companies operating in different Industries have different Working Capital requirements. A purely Trading Organization will basically have finished goods Inventory, Accounts Receivable and Cash as Current Assets and Accounts Payable as Current Liability. On the other hand, Capital Goods manufacturing and Trading Companies will have a high proportion of Current Assets in the form of inventory of Raw Materials and Work-in-Progress. Thus, the nature of Business is directly linked to the requirement of Working Capital. 2. Nature of Raw Material Used The nature of Raw Material used in the manufacture of finished goods greatly influences the quantum of Raw Material Inventory. For example, if the raw Material is an agricultural product whose availability is pronouncedly seasonal in character, the proportion of Raw Material Inventory to Finished Goods Inventory will be quite high. Similarly companies using Imported Raw Materials with long lead time tend to have a high proportion of Raw Material Inventory. In the case of Capital Goods Manufacturing Company the demand for whose product is growing over time, the tendency will be to have high Inventory of Raw Material and Components. 3. Process Technology Used In case the Raw Material has to go through several stages during the process of production, the Work-in-Progress Inventory is likely to be much higher than any other item of the Current Assets thereby increasing the need of Working Capital. 4. Nature of Finished Goods The nature of Finished Goods greatly affects the amount of finished goods inventory. For example, if the finished goods have a short span of 'shelf-life' as in the case of cigarettes the finished goods inventory will constitute a very low percentage of current assets.

In the case of companies the demand for whose finished goods is seasonal in nature, as in the case of fans, the inventory of finished goods will constitute a high percentage of total current assets. This is mainly because from the point of view of the fixed costs to be incurred by the company it would be more economical to maintain an optimum level of production throughout the year than by stepping up production operations during the busy season. 5. Degree of Competitionin the Market When the Degree of Competition in the market for finished goods in an industry is high, then companies belonging to the Industry may have to resort to an increased credit period to its customers, partially lowering credit standards and similar other practices to push their products. These practices are likely to result in a high proportion for Accounts Receivables thereby increasing the need for Working Capital. 6. Growth and Expansion As the company grows, it is logical to expect that a larger amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the growth in volume of business of a company and the increase in the working capital. The composition of working capital also shifts with economiccircumstances and corporate practices. Other things being equal, growth Industries require more working capital than those that are static. The Critical fact however, is that the need for increased working capital funds does not follow the growth in business activities but precedes it. Advance planning of working capital, is therefore a continuing necessity for a growing concern

Factors Affecting Working Capital Or Determinants Of Working Capital

Requirements Of working capital depend upon various factors such as nature of business, size of business, the flow of business activities. However, small organization relatively needs lesser working capital than the big business organization. Following are the factors which affect the working capital of a firm: 1. Size Of Business Working capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital.

2. Nature Of Business Working capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital.
Nature of business: The working capital requirement of a firm is closely related to the nature of business . A service firm , like electricity undertaking or a transport corporation which has a short operating cycle and which sells predominantly on cash basis , has a modest working capital requirement . On the other hand , manufacturing concern like a machine tools unit , which has a long operating cycle and which sells largely on credit has a very substantial working capital requirement .

3. Storage Time Or Processing Period Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period Sis high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress. 4. Credit Period Credit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital. 5. Seasonal Requirement In certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives

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6. Potential Growth Or Expansion Of Business If the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business. 7. Changes In Price Level Change in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets. 8. Dividend Policy The dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital. 9. Access To Money Market If a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital. 10. Working Capital Cycle When the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital. 11. Operating Efficiency The operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.