NEEDS OF WORKING CAPITAL
Working Capital is an essential part of the business concern. Every business concern must
maintain certain amount of Working Capital for their day-to-day requirements and meet
the short-term obligations.
Working Capital is needed for the following purposes.
1. Purchase of raw materials and spares: The basic part of manufacturing process
is, raw materials. It should purchase frequently according to the needs of the
business concern. Hence, every business concern maintains certain amount as
Working Capital to purchase raw materials, components, spares, etc.
2. Payment of wages and salary: The next part of Working Capital is payment of
wages and salaries to labour and employees. Periodical payment facilities make
employees perfect in their work. So a business concern maintains adequate the
amount of working capital to make the payment of wages and salaries.
3. Day-to-day expenses: A business concern has to meet various expenditures
regarding the operations at daily basis like fuel, power, office expenses, etc.
4. Provide credit obligations: A business concern responsible to provide credit
facilities to the customer and meet the short-term obligation. So the concern must
provide adequate Working Capital.
Working Capital Position/ Balanced Working Capital Position.
A business concern must maintain a sound Working Capital position to improve the efficiency
of business operation and efficient management of finance. Both excessive and inadequate
Working Capital lead to some problems in the business concern.
A. Causes and effects of excessive working capital.
(i) Excessive Working Capital leads to unnecessary accumulation of raw
materials, components and spares.
(ii) Excessive Working Capital results in locking up of excess Working Capital.
(iii) It creates bad debts, reduces collection periods, etc.
(iv) It leads to reduce the profits.
B. Causes and effects of inadequate working capital
(i) Inadequate working capital cannot buy its requirements in bulk order.
(ii) It becomes difficult to implement operating plans and activate the firm’s
(iii) It becomes impossible to utilize efficiently the fixed assets.
(iv) The rate of return on investments also falls with the shortage of Working
(v) It reduces the overall operation of the business.