Characteristics of Working Capital
A business requires funds in order for it to be successful in the wide industry of corporations. This will serve as the lifeblood of the company for without it, the business will also be nothing.
For this, it is a must for all business owners to be able to know all about the characteristics of working capital as well as the other aspects that come with it.
There are several things that any business owner must know when working capital is concerned. Being aware of these things will help a lot in order to assure success in the business.
Working Capital Defined
Aside from serving as fixed assets financing, all business definitely need funds on a regular basis in order for its operations to continue. This will encompass the expenses made for raw material purchases, manufacturing, followed by selling and finally administrating the sold until money is realized. Business transactions are usually made on credit with several days elapsing before the proceeds of the sale will be able to pay for it. Although most of the materials can be bought on credit, any business will still have to pay the employees, meet the expenses for manufacturing and selling such as power, wages, transportation, supplies and communication as well as balance the purchases of the raw materials. Working capital basically means as the financing source needed by the business entities on a regular basis so that needs will be met.
Characteristics of Working Capital
- Needs that are Short Term: Working capital is being utilized in acquiring current assets which will be converted to cash for a short period only.
- Circular Movement: Working capital is being converted to cash constantly which will just be turned as a working capital all over again.
- Permanency: Although it is just a kind of short term capital, working capital is needed by a business forever and always.
- Fluctuation: Working still fluctuates every now and then even it is something permanent.
- Liquidity: It is very liquid for it can be converted as cash any time without losing anything.
- Less Risky: Investments in current assets such as working capital comes with less risk for it is just for short term.
- No Need for Special Accounting System: Since working capital is a short term asset that will last for a year only, there will be no need for adoption of a special accounting system.
Sources of Working Capital
- Operational funds
- Sales of assets that are non-current
- Long term investments’ sales
- Physical fixed assets’ sales
- Intangible fixed assets’ sales
- Financing for longer term
- Borrowings that are long term
- Issuance of preference and equity shares
More about Working Capital
Working capital is definitely affected by various transactions on a regular basis. The mentioned characteristics will result to financing that is limited. This is due to the fact that the client will only be charged for the interest for just the average utilized outstanding and will be save from the trouble of having to reinvest on surpluses that are short term that usually arise out of the use of low working capital at a certain point in time.
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