And that's when it is said that this particular business is having cash-flow problems. The daily operations working capital is used to manage include, stock purchases, salaries and wages, heating and lighting expenses, funding of credit sales etc. (McKosker, Philip, March 1, 2000)
Components of working capital include all those things that form part of the definition of working capital since working capital equals current assets less current liabilities, all those things that are categorized under these two things can be called a component of working capital. The three main components namely are, inventory, payables and receivables.
Inventory here includes all the stock, opening plus closing. (Managing Working Capital, n.d.) Inventory also includes raw materials,work-in-progress stock of goods and even finished stock of goods. These all are categorized under the assets portion on a business balance sheet. (Inventory, 2008)
Inventory payables refers to a business's creditors who are those people or institutions from where you borrow loans or buy good/stock from on credit. A creditor is hence an organization or person who gives out credit to other businesses. A business pays these people at the end of a term or after a set time period as arranged or agreed upon through a contract. (Creditor, 2008)
Receivables, on the other hand are those people or organizations that owe the business rather. ...
Hence, they are termed as debtors. Just like creditors, businesses form a contract with them too which states how much money ahs been given, for how long, for what and when will it have to be repaid etc. (Money You are Owed, 2004).
There are sources of working capital. These are called parts of working capital of a business. These are: cash held in reserve in the business, band OD (over-draft), remaining or retained profits, loans, credit attained from creditors, and long-term loans. (Managing Working Capital, n.d.)
'Control of working capital has always been thought to be the most important factor in the short-term financial management of companies'
This statement, I believe is very much true for businesses working today.
These days as competition amongst companies has been soaring up almost perpetually, it is highly important for these companies to manage their working capital well. It does not just depend or vary from one economic situation to another, rather on he basic fact that these companies all need to survive first and foremost.
Hence, managers or financial executives or anyone who has the work of managing cash flows for a business aims to maximize working capital and get more value for money generally. Another way to say this is through acquiring more worth for short-term cash or cash as a business' current asset. (Bauer, Dennis, 2007).
It is highly imperative for these managers to handle each component of working capital efficiently. These components have already been discussed above.
(Working Capital, n.d.)
It is often said that working capital is the lifeblood of an organization. It holds so much information that it is sometimes claimed