Working capital is defined as the excess of current assets over liabilities. Current assets are those assets which will be converted in to cash within the current accounting period or with in the next year as a result of the ordinary operation of the business. They are cash or near cash resources. The value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold accounts receivables are created. Working capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business. Working capital is required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as operating cycle of the business.
[...] Working capital Excess of current assets over current liabilities. Current assets They are those assets, which can be normally converted into cash with in a period of one year or normal operating cycle of the business which ever is longer. Current liabilities They are those liabilities, which are payable with in one year or normal operating cycle of the business which ever is longer. Net Working capital It is the excess of current assets over current liabilities in other words it is that portion of company's current assets which is financed by long- term funds. [...]
[...] 3.Length of manufacturing process. 4.Credit policy. 5.Rapidity of turnover. 6.Seasonal fluctuations. 7.Fluctuations of supply. NEED FOR WORKING CAPITAL Working capital is required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as operating cycle of the business. In case of manufacturing company, the operating cycle is the length of time necessary to complete the following cycle of events; Conversion of cash into raw materials; Conversion of raw materials into work-in-process; iii) Conversion of work-in-process into finished goods; iv) Conversion of finished goods into account receivables; Conversion of account receivables into cash. [...]
[...] Working capital management WORKING CAPITAL MANAGEMENT Working capital is defined as the excess of current assets over liabilities. Current assets are those assets which will be converted in to cash within the current accounting period or with in the next year as a result of the ordinary operation of the business. They are cash or near cash resources. These include: Cash and bank balances Receivables Inventory Raw materials, stores and spares Work in progress Finished goods Prepaid expenses Short term advances Temporary investments The value represented by these assets circulates among several items. [...]
[...] Cash includes cash in hand, cash at bank, and readily realizable investments or securities. This ratio indicates the extent to which cash resources are efficiently utilized by the enterprise. It is also helpful in determining the liquidity of a concern. NET ANNUAL SALES CASH 6.Working capital turnover ratio or sales to working capital ratio: - This ratio indicates the efficient or inefficient utilization of the working capital of the enterprise. Higher the working capital ratio indicates the efficiency and lower working capital turnover ratio indicates the inefficiency of the management 7. [...]
[...] The borrower has to pay interest on the total amount. The loans are repayable on demand or in periodic installments. They can also be renewed from time to time. As a form of financing, loans imply a financial discipline on the part of the borrowers. From a modest beginning in the early nineties, at least 80% of credit limit must be in the form of loans. Term loans for working capital Under this arrangement, banks advance loans for 3-7 years repayable in half- early installments. [...]
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