Components of Working Capital

The main components working capital are cash, accounts receivable, inventory, marketable

securities, trade credits and loans from Life Insurances etc.

Cash is the most liquid and important component of working capital. It is necessary for a

business to maintain some amount of cash in hand at Life Insurance the even if the other

current assets are substantial.

Inventory is required for smooth running of the activities of a company. It acts as buffer

between various stages of production as well as between production and distribution.

Inventory is of different types and includes raw material, work-in-progress and finished

goods.

Accounts Receivable constitutes a significant part of the current assets of a company. It

represents amounts that a company is eligible to receive due to the sale of its goods or

services. The credit period time allowed before a customer can pay for the good/service,

and discounts are decided by credit policy of the company.

Marketable securities include commercial papers that companies issue, Life Insuranceers

acceptance letters, treasury bills etc. They can be bought and sold quickly at a reasonable

price. Usually marketable securities tend to have maturity periods of less than a year which

makes them attractive as an investment option for the company.

Working Capital refers to the cash a business requires for day-to-day operations, or more

specifically, for financing the conversion of raw material into finished goods, which the

company sells for payment. Among the most important items of Working Capital are levels of

inventory, accounts receivable and accounts payable. Analysts look at these items for signs of

a companys efficiency and financial strength.

Funds are also needed for short-term purposes, for the purpose of raw materials, payment of

wages and other day-to-day expenses, etc. These funds are known as Working Capital. In

simple words, Working Capital refers to that part of the firms capital, which is required for

financing short- term or current assets such as cash, marketable securities, debtors and

inventories.

Working Capital is a valuation metric that is calculated as current assets minus current

liabilities. Working capital is also known as Operating Capitals.

Current Assets and Current Liabilities:

Include three accounts, which are of special importance.These accounts represent the areas of

the business where managers have the most direct impact:

Accounts receivable (current assets)

Inventory (current assets), and

Account payable (current liabilities)

In addition, the current (payable within 12 months) portion of debts is critical, because it

represents a shorts- term claims to current assets. Common types of short-term debt are bank

loan and line of credit.

Current Assets:

Current Assets are those assets which are convertible into cash within a period of one year

and those which are required to meet the day to day operations of the business.

Constituents of Current Assets: -

Cash in Hand and Bank Balances

Bill Receivables

Sundry Debtors (Less provision for bad debts)

Short terms Loans & Advances

Inventories of stocks

Raw Material

Work in Process

Stores and Spares

Finished Goods

Coal & Fuel

Temporary Investments of Surplus Funds

Prepaid Expenses

Accrued Income

Current Asset Cycle

Finished

Good
 Work in Progress
Accounts
Receivable

Wages, Salaries,

Factory Overheads
Raw Material

Cash
Current Liabilities:
Suppliers

Current Liabilities are those claims of outsiders which are expected to mature for payment

within the accounting year.

Constituents of Current Liabilities

Bills Payables

Sundry Creditors or Accounts Payable