Question

. What is working capital? What is the need for a working capital?

Answer 1

Money needed to fund the normal, day- to-day operations of a business is known as the working capital.

1. Adequate working capital is required for the smooth running of any business.
2.  It is required by a business for meeting day to day business expenses to complete a business cycle or the operating cycle.

The working capital of a business keeps on circulating or changing since the money circulates in various forms of assets in a continued manner.

The above diagram explains that:

1. In a business concern operating cycle begins with outflow of cash towards the purchase of raw materials, payment of labour, power, fuel and other expenses converting the raw materials into work in progress and converting them into finished goods. Sale of finished good for cash or credit.
2.  If on credit then conversion of account receivables into cash.
3. This operating cycle indicates that funds once tied up in the form of raw materials are later converted into the form of finished goods.
4. In a manufacturing concern there is a time gap between the first step of purchasing of raw-materials to last step of selling of goods and realizing cash. This time duration is called operating cycle. It is also called the “changing” or circulating capital because money circulates in various forms of assets in a continued manner.