Working Capital



Working Capital

Working Capital

Background

The term working capital originated as such in a time when most of the industry was closely linked to agriculture, processors bought the harvest in autumn, processed, sold the finished product and ended before the next crop with relatively low inventories. Bank loans were used maturities exceeding one year to finance both the purchase costs of materials as raw processing, and these loans withdrew the funds from the sale of new finished products.

Definitions

The working capital can be defined as state that is “the current assets of the company-funded long-term”. A company must maintain a satisfactory level of working capital. The assets must be large enough to cover current liabilities, in order to consolidate a reasonable margin of safety. The use of net working capital in the use of funds is based on the idea that available assets, which by definition can become effective in a short period, may likewise be allocated to pay the debts or obligations hereunder, as is usually done with cash (Bhattacharya, 2009). The reason for the use of net working capital (and other liquidity ratios) to assess the liquidity of the company, lies in the idea that the greater the range in which assets of a company cover its current liabilities (current liabilities) much greater capacity to generate payment to pay their debts at the time of its maturity.

Explanation

Working capital is the investment of a firm in assets for short-term. The net working capital is defined as current assets less current liabilities; the latter include bank loans, commercial paper and accrued wages and taxes. Provided that the assets exceed the liabilities, the company will have net working capital, most companies operate with a amount of net working capital, which depends largely on the type of industry to belonging, companies with predictable cash flow, and electrical services, can operate with a negative net working capital, while most enterprises must maintain positive levels of such capital. The working capital management is important for several reasons as assets circulating a typical industrial company representing more than half of its assets total. In the case of a distributor represent further. For a company operate efficiently it is necessary to carefully monitor and control accounts receivable and inventories. For a fast-growing company, this is very important because of the investment in these assets can easily spiral out of control (Mathur, 2007). Excessive levels of current assets can ...