What Is "Working Capital"?

Adequacy of working capital arises the credit standing of the concern.  Such a concern can buy goods on better terms and reduce the cost of production on account of receipt of cash discounts.

A concern is sure to fail, if there is inadequate supply of material or cash.  Nowadays production is carried on in anticipation of demand.  There is a time between the point of supply of raw material and the ultimate realization of the sale proceeds of finished products.   A large amount of working capital is required to keep business moving continuously.  Many new businesses are floating very well in the beginning but are unable to run properly usually because of inadequacy of working capital.

Adequacy of working capital is one of the most important conditions for the successful running of the business.  Business performance is likely to be affected to a large extent in the absence of adequate amount of working capital.

Working capital can be divided into two types:

1. Initial working capital:  It is the amount required to meet all current expenses during the early development of business.  This period may vary in different types of business according to their nature.

2. Regular working capital:  It is the amount required after the business has been established as a going concern.  The regular working capital consists of two parts:  a) Fixed and b) Variance

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