What is working capital?
Working capital is the amount used to meet the day to day operation activities of a business. In the broad sense, the term working capital is used to denote the total value of current assets.
Needs for working capital
An effective operation of a business is based on the proper management of working capital. Initially, the business unit should forecast the adequate working capital. In this context, working capital forecasting is getting more importance than the management of working capital. Generally, each business unit requires adequate amount of capital. The reason is that capital is required for the establishment of a business units and its proper functioning.
Fixed assets such as Land and Building, fixtures, furniture, machinery, plant and other fixed assets are required for the establishment of a business. A portion of capital is used to acquire the fixed assets. Such capital is called fixed capital. After the establishment, the business unit should function properly.
Functioning means carrying the activities like trading, service or manufacturing.Trading means buying and selling of goods without making any alteration in the goods.Service means rendering of intangible things like electricity, parcel service, courier service, telephone, lorry service and the like. Manufacturing means conversion of raw materials into finished goods which is meant for sale.Therefore, the business unit requires capital for its proper functioning i.e. meeting the expenses of day to day activities. Such capital is called working capital. The other names of working capital are Circulating Capital and Revolving Capital.