In order to understand the value of working capital for modern businesses it would be necessary to describe the key elements of the particular concept. Then its role in the development of business activities will be made clear. In accordance with Van Horne et al the term ‘working capital’ is usually described as the current assets of the organization. However, this description is not fully accurate.
Indeed, working capital reflects the organization’s current assets but its form is not standardized. In fact, working capital can be classified by referring either: a) to its components or
b) the time. In the context of its components, the working capital is characterized as ‘cash, inventory or receivables’.
On the other hand, working capital can be used for serving either long term organizational needs – in this case is characterized as permanent working capital – or short term needs; in the last case, the working capital is characterized as temporary working capital and reflects the current assets used for covering emergent organizational needs. The key differentiation between the permanent and the temporary working capital is that the former is likely to be standardized while the latter is differentiated in accordance with the seasonal needs of the organization. ...Show more