Working capital 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. Net working capital is working capital minus cash (which is a current asset) and minus interest bearing liabilities (i.e. short term debt). It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). Working Capital = Current Assets Current Liabilities

Factors Determining Working Capital Requirements (1) Nature and Volume of Business: The nature and volume of business is an important factor in deciding the amount of working capital. For example, the amount of working capital is generally more in trading concerns and in service units as compared to the manufacturing units. The retail trading units have also to invest large funds in working capital. In some manufacturing units also, the working capital holds a significant place. On the other hand, public utilities require less working capital. Other manufacturing units need more working capital as compared to public utilities.The relation between the volume of business and the requirement of working capital is more direct and clear. The bigger the size of the units, the more will be the requirement of working capital. (2) Length of Manufacturing Cycle: The time that elapses from the purchase and use of raw materials to the production of finished goods is called manufacturing cycle. The longer the period a manufacturing cycle takes, the larger is the amount of working capital required, because the funds get locked up in production process for a longer period of time. (3) Business Fluctuations: Business fluctuations are of two types: seasonal fluctuations which arise out of seasonal changes in demand for the product and cyclical fluctuations which occur due to ups and downs of economic activities in the country as a whole.If demand for the product is seasonal, production will have to be increased during the season, and it will have to be reduced during the off-season. Correspondingly, there will be fluctuations in the requirement of working capital. The business unit will have to face some other problems in addition to this one. It has to bear extra expenses to increase production when product demand increases. It has to bear, costs even to maintain work force and physical facilities during slack season. For this reason, many units prefer to continue production even during slack season and increase the level of their inventories. .

(4) Production Policy: The production policy of business is also an important determinant of working capital requirement. If the policy of Constant Production is adopted, there are two possible effects. If demand for the product is regular and constant, this policy helps in reducing working capital requirement to the lowest possible level. But if demand for the product is seasonal, this policy raises the level of inventory during off season and thereby increases the working capital requirement. If the cost of maintaining inventory is considerably high, the policy of varying production according to demand is preferred. If the unit produces varied products, it can reduce the requirement of working capital by adjusting the structure of production to the changes in demand. (5) Credit Policy: In the present-day circumstances, almost all units have to sell goods on credit. The nature of credit policy is an important consideration in deciding the amount of working capital requirement. The larger the volume of credit sales, the greater will be the requirement of working capital. Also, the longer the period the collection of payment takes, the greater will be the requirement of working capital. (6) Growth and Expansion: The working capital requirements increase with growth and expansion of business. Hence planning of the working capital requirements and its procurement must go hand in hand with the planning of the growth and expansion of the firm. The implementation of the production plan that aims at the growth or expansion of the unit necessitates more of fixed capital and working capital both. (7) Profit and its Distribution: The net profit of a firm is a good index of the resources available to it to meet its capital requirements. But, from the viewpoint of working capital requirement, it is the profit in the form of cash which is important, and not the net profit. The profit available in the form of cash is called cash profit and it can be assessed by adding or deducting non-cash items from the net profit of the firm. The larger the amount of cash profit, the greater will be the possibility of acquiring working capital. (8) Operating Efficiency: If a firm is efficient, it can use its resources economically, and thereby it can reduce cost and earn more profit. Thus, the working capital requirement can be reduced by more efficient use of the current assets. (9). Turn over. The greater the velocity in the turn over of working capital, the lesser the amount of working capital, the lesser the amount of working capitals needed.. (10). 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