What is meant by working capital ? Discuss two important determinants of working capital requirements.

Answer – Gross working capital means investment in current assets. Net working capital = current assets − current liabilities. Current assets, such as cash, inventory and receivables, normally convert into cash or are used within the operating cycle or a short period. Working capital supports routine expenses and uninterrupted operations.

Determinants

• Nature of business: manufacturing usually needs more inventory and processing time than many service businesses.
• Scale of operations: greater activity generally requires more funds.
• Business cycle: boom conditions usually increase needs; recession can reduce activity but also slow collections.
• Seasonal factors: peak seasons need additional inventory and cash.
• Production cycle: longer processing ties up funds for longer.
• Credit allowed: more customer credit increases receivables.
• Credit availed: supplier credit reduces immediate cash needs.
• Operating efficiency: faster turnover and collection reduce funds tied up.
• Availability of raw materials: uncertain supply may require larger stocks.
• Growth prospects: expansion increases operating requirements.
• Competition: liberal credit and larger stocks may be needed.
• Inflation: higher input prices generally increase the funds required for the same volume.

Example: current assets of ₹5,00,000 less current liabilities of ₹3,50,000 give net working capital of ₹1,50,000.