1. Do you know what are the sources used for financing temporary requirement of working capital?
The sources used for financing temporary requirement of working capital are:
1) Spontaneous Sources
a. Trade Credit
b. Outstanding Expenses
2) Inter Corporate Deposits
3) Commercial Papers
4) Banks
5) Advances received form customers
6) Various short term provisions
7) Fixed deposits for a period of 1 year or less
2. What is Variable working capital?
Variable working capital is that portion of the total capital that is required over and above the fixed working capital. This working capital is required to meet the seasonal needs and some contingencies. The requirement of this type of working capital changes with the changes in the level of activity.
3. What is Fixed working capital?
Fixed working capital is that portion of the total capital that is required to be maintained in the business on the permanent basis or uninterrupted basis. This working capital is required to invest in fixed assets. The requirement of this type of working capital is unaffected due to the changes in the level of activity.
Following current liabilities can be used as spontaneous source of financing the working capital:
1) Trade Credit
2) Outstanding Expenses
Trade credit is an arrangement in which a company buy goods or services without making immediate cash payment. If a company buys raw materials from the suppliers on credit basis, it gets the raw material for utilization immediately with the facility to make the payment at the delayed time. By accepting the delayed payment, the suppliers of raw material finance the requirement of working capital. It is an essential element of capitalization in an operating business because it can reduce the capital investment required to operate the business if it is managed properly.
Outstanding expenses are the expenses that are unpaid at the end of the accounting period, which means they are payable but not yet paid. This may apply to salaries, wages, telephone expenses, electricity expenses, water charges etc. All the outstanding expenses come under nominal accounts and must be credited.
5. Explain what factors affect working capital requirement?
Factors affecting working capital requirement:
1) Nature of business
2) Size of the organization
3) Phase of trade cycles
4) Production policies
5) Turnover of inventories
6) Dividend Policies
7) Trading terms
8) Length of production cycle
9) Profitability
10) Seasonal Variations.
6. What is Outstanding expenses?
Outstanding expenses are the expenses that are unpaid at the end of the accounting period, which means they are payable but not yet paid. This may apply to salaries, wages, telephone expenses, electricity expenses, water charges etc. All the outstanding expenses come under nominal accounts and must be credited.
Trade credit is an arrangement in which a company buy goods or services without making immediate cash payment. If a company buys raw materials from the suppliers on credit basis, it gets the raw material for utilization immediately with the facility to make the payment at the delayed time. By accepting the delayed payment, the suppliers of raw material finance the requirement of working capital. It is an essential element of capitalization in an operating business because it can reduce the capital investment required to operate the business if it is managed properly.
8. What is the primary objective of working capital management?
The primary objective of working capital management is to avoid over investment or under investment in current assets, as a very large amount of funds are blocked in current assets in practical circumstances. Management of working capital ensures that sufficient cash is available to meet day to day cash requirements. Maximization of profits is another primary objective of working capital management. The management of working capital involves managing inventories, accounts receivable and payable, and cash. In other words, the goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses.
Working capital represents the operating liquidity available to a business organization. Working capital may mean Gross Working Capital or Net Working Capital. Gross Working Capital is equal to Current Assets and Net Working Capital is equal to Current Assets less Current Liabilities.
10. Do you know spontaneous source of financing variable working capital?
Spontaneous source of financing variable working arises in the normal course of business operations. It is also known as current liabilities. This source of financing is unsecured in nature and varies with the level of sales. They do not have any explicit cost attached to the same.
