A firm with a deficiency of net working capital is said to be overtrading. Small firms which expand too rapidly frequently fall into this difficulty. They become aware of it when, despite (or because of) excellent trade, they experience a sudden shortage of cash. So long as trade expands, little difficulty will be encountered, but as soon as a slight contraction takes place the firm may run into trouble.
The facts of each case must be considered, but the requirements for working capital can be determined, in view of the following factors:
- The normal period of credit given on purchases and taken on sales.
- The normal incidence of expenses, taking into account seasonal variations.
- The rate of turnover of stock inventory. Some businesses, must have more capital tied up in stock inventory than others, e.g. a furniture shop holds stocks of higher value than a sweet shop.
- The credit worthiness of the proprietors in the case of sole trader, partnership and private limited companies.
Gross working capital is the total amount of current assets available to a company, specifically all those current assets which are … Continue Reading
Net working capital is the remaining amount of current assets available to a company after settling it’s current liabilities or net working capital is total current assets minus … Continue reading
Working capital ratio indicates the ratio of current assets to current liabilities; for example … Continue reading