Q.13. What is meant by Working Capital ? Explain any two factors affecting working capital requirements of a firm ?

Every business needs to take the decision regarding the investment in current assets i.e. the working capital. Current assets refer to the assets that are converted into cash or cash equivalents in a short period of time (less than or equal to one year). There are two broad concepts of working capital namely, Gross working capital and Net working capital.

Gross working capital (or, simply working capital) refers to the investment done in the current assets. Net working capital, on the other hand, refers to the amount of current assets that is in excess of current liabilities. Herein, current liabilities are those obligatory payments which are due for payment such as bills payable, outstanding expenses, creditors, etc. Net Working Capital is calculated as the difference of current assets over current liabilities. i.e.

NWC = Current Assets − Current Liabilities

Two Factors affecting working capital requirements are : 
1. Size of Business - more large scale business needs huge amount of working capital.
2. Type of business - Is it manufacturing or service industry, Manufacturing takes more capital requirement as compared to service industry.


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