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WCM/U1 Topic 2 Types of Working Capital, Determinants of Working Capital

Types of working Capital

(a) Gross Working Capital:

Gross working capital refers to the amount of funds invested in vari­ous components of current assets. It consists of raw materials, work in progress, debtors, finished goods, etc.

(b) Net Working Capital:

The excess of current assets over current liabilities is known as Net working capital. The principal objective here is to learn the composition and magnitude of current assets required to meet current liabilities.

(c) Positive Working Capital:

This refers to the surplus of current assets over current liabilities.

(d) Negative Working Capital:

Negative working capital refers to the excess of current liabilities over current assets.

(e) Permanent Working Capital:

The minimum amount of working capital which even required dur­ing the dullest season of the year is known as Permanent working capital.

(f) Temporary or Variable Working Capital:

It represents the additional current assets required at different times during the operating year to meet additional inventory, extra cash, etc.

It can be said that Permanent working capital represents minimum amount of the current assets required throughout the year for normal production whereas Temporary working capital is the addi­tional capital required at different time of the year to finance the fluctuations in production due to seasonal change. A firm having constant annual production will also have constant Permanent work­ing capital and only Variable working capital changes due to change in production caused by seasonal changes. (See Figure 7.1.)

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Similarly, a growth firm is the firm having unutilized capacity, however, production and operation continues to grow naturally. As its volume of production rises with the passage of time so also does the quantum of the Permanent working capital. (See Figure 7.2.)

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Determinants of Working Capital

(A) Current Assets:

These assets are generally realized within a short period of time, i.e. within one year.

Current assets include:

(a) Inventories or Stocks

(i) Raw materials

(ii) Work in progress

(iii) Consumable Stores

(iv) Finished goods

(b) Sundry Debtors

(c) Bills Receivable

(d) Pre-payments

(e) Short-term Investments

(f) Accrued Income and

(g) Cash and Bank Balances

(B) Current Liabilities:

Current liabilities are those which are generally paid in the ordinary course of business within a short period of time, i.e. one year.

Current liabilities include:

(a) Sundry Creditors

(b) Bills Payable

(c) Accrued Expenses

(d) Bank Overdrafts

(e) Bank Loans (short-term)

(f) Proposed Dividends

(g) Short-term Loans

(h) Tax Payments Due

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