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Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business. A lack of working capital makes it hard to attract investors or to get business loans or obtain credit.
There are two components in working capital they are as follows: 1.Current assets 2.Current liabilities
CURRENT ASSETS
These are those real assets which are intended to be disposed off and get it converted into money / moneys worth within a period of 12 months. Examples: Closing Stock (RM, WIP, Finished Goods) Sundry Debtors Bills Receivable Cash in Hand and Bank Pre-paid Expenses Loans Given Advance to Suppliers, etc.
CURRENT LIABILITIES
These are those outsiders liabilities which are payable within a period of 12 months. Examples: Sundry Creditors Bills Payable O/S Expenses Advance from Customers Tax Payable Bank Overdraft, etc.
Operating cycle
Working capital is also known as revolving capital and a circular path of conversion/reconversion takes place. This revolution of cycle is called as the operating cycle. we can say that the term operating cycle, otherwise called as cash cycle refers to the length of time necessary to complete the following cycle of events: 1.Conversion of cash into inventory 2.Conversion of inventory into debtors 3.Conversion of debtors into cash
Stage 1: Cash to Inventory In this stage, cash first gets converted into raw materials, then work-in-progress and then finished goods in a typical manufacturing concern. As regards non-manufacturing concerns, when the goods are purchased, cash gets converted into inventory
Stage 2: Inventory to Debtors The inventory thus produced or purchased, gets converted into debtors or receivables upon credit sales. Stage 3: The debtors or accounts receivables get in turn converted back into cash when they make payment.
Funds from business operations. Other incomes. Sale of non-current assets. Long-term borrowings. issue of additional equity capital or preference share capital.
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