Headlines
Published On:Monday, 19 December 2011
Posted by Muhammad Atif Saeed

The importance of working capital

Definition of working capital
The net working capital of a business is its current assets less its current liabilities
Current Assets include:
- Stocks of raw materials
- Work-in-progress
- Finished goods
- Trade debtors
- Prepayments
- Cash balances
Current Liabilities include:
- Trade creditors
- Accruals
- Taxation payable
- Dividends payable
- Short term loans
Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies.
Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well.
Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due.
Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity.
Increased production tends to engender a need to hold additional stocks of raw materials and work in progress. Increased sales usually means that the level of debtors will increase. A general increase in the firm’s scale of operations tends to imply a need for greater levels of cash.

http://www.sarbanesoxley.biz/wp-content/uploads/2011/05/personal-finance-for-women.jpg

About the Author

Posted by Muhammad Atif Saeed on 21:07. Filed under , . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response

By Muhammad Atif Saeed on 21:07. Filed under , . Follow any responses to the RSS 2.0. Leave a response

0 comments for "The importance of working capital"

Leave a reply

Visit Counters

About Me

My photo
I am doing ACMA from Institute of Cost and Management Accountants Pakistan (Islamabad). Computer and Accounting are my favorite subjects contact Information: +923347787272 atifsaeedicmap@gmail.com atifsaeed_icmap@hotmail.com

    Online Visitors:

    Blog Archive

x

Welcome to eStudy.Pk....Get Our Latest Posts Via Email - It's Free

Enter your email address:

Delivered by FeedBurner