The working capital in certain enterprise may be classified into the following kinds. (1) Initial working capital (2) Regular working capital (3) Fluctuating working capital (4) Reserve margin working capital 1. Initial working capital. The capital, which is required at the time of the commencement of business, is called initial working capital. These are the promotion expenses incurred at the earliest stage of formation of the enterprise which include the incorporation fees. Attorney's fees, office expenses and other preliminary expenses. 2. Regular working capital. This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. For purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. 3. Fluctuating working capital. This capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by improvement or extension of machinery. It may be secured from any financial institution which can, of course, be met with short term capital. It is also called variable working capital. 4. Reserve margin working capital. It represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the running life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business.
Working Capital is business cash that is needed for day-to-day operations. The important items of working capital are levels of debtors, creditors and inventory. These items are sign of a business's efficiency and financial strength. The business net working capital is the difference between current assets and current liabilities i.e. Net Working Capital =Current Asset – Current Liabilities. The company wants to borrow less if it properly manages its working capital. All business wants sufficient amount of liquid resources in order to keep daily or everyday cash flow. The company desires sufficient amount of cash to give wages and salaries. Maintaining enough working capital is not that much important in the short-term but there should be sufficient liquidity in order to make sure the existence of the business in the long-term. Profitable business might not succeed if it does not have enough cash flow to meet its liabilities. For that reason when businesses formulate investment decisions they should not only consider the financial expense engaged with obtaining the new building or new machine, etc, but should also consider other current assets that are generally engaged with any development of activity.
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
Working capital is what is need to do the business of the business. Without sufficient working capital then a business will not be able to provide the goods or services required in order to maintain their business or operations.
Working capital is the funds that keep a business a business. With out working capital the payroll, purchases and production of an operation would cease. It is the life blood of a business. This is why there are so many problems today as all the available working capital some of which are short term loans until payments from customers are received fund the company. Since no one will loan money companies have no working capital and it is putting a major strain on production.
Working capital is the blood that runs business activities most especially day to day activities and just as blood is important to the human body so is working capital to an entity without which no business can survive.
