Working capital is the excess of current assets over current liabilities.Proper management of working capital is very important for the success of an enterprises.It aim purchasing power of assets and maximizing the return on investment.Sales expansion ,dividend declaration plant expansion new product line increased salaries and wages,rising price levels etc puts added strain on the working capital maintenance.
Current Assets:- are those assets that can be turned in to cash with in brief period i.e one year. e.g Inventory, cash in hand and in bank,bills receivables,,prepaid expenses etc.
Current Liabilities:- Liabilities which can be paid with the short period normally one year e.g Bills payable, cash credit bank O.D, dividend declared and payable etc.
Sources of Working Capital.
Long term sources:-
- Sales of shares
- Sales of debentures
- retained earnings
- Sales of idle fixed assets
Medium and short term sources:-
- Internal Sources
- Reserves and provisions
- Inter- corporate loans and deposits
2. External sources
- Trade credit
- Bank credit
- Public deposits
- Customers advance
- commercial paper
- Term loans
Working capital requirement can be determined mainly in the three ways
1.Per cent-of -sales method :- It is a traditional and simple method of determining the volume of working capital an its components , sales being the dominant factor.In this method working capital is determined as per cent of forecasted sales
2.Regression Analysis method:-It is the statistically method for forecasting the working capital.
3.The working capital cycle method:-It refers to the period that a business enterprise takes in converting cash back in to cash.