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Characteristics of Working Capital

A business requires funds to succeed in the vast industry of corporations. This will serve as the company's lifeblood; without it, the business will also be nothing.

For this, it is a must for all business owners to know all about the characteristics of working capital and the other aspects that come with it.

working capital

There are several things that any business owner must know when working capital is concerned. Being aware of these things will help ensure success in the business.

Working Capital Defined

Aside from serving as fixed assets financing, all businesses need funds regularly for their operations to continue. This will encompass the expenses made for raw material purchases, manufacturing, then selling, and finally administrating the sale until the money is realized. Business transactions are usually made on credit, with several days elapsing before the sale proceeds can 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, and balance the purchases of the raw materials. Working capital means the financing source needed by the business entities regularly so that needs will be met.

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Characteristics of Working Capital

  • Needs that are Short Term: Working capital is being utilized to acquire current assets, which will be converted to cash only for a short period.
  • Circular Movement: Working capital is being converted to cash constantly, which will just be turned into working money.
  • 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 now and then, even if it is something permanent.
  • Liquidity: It is very liquid and can be converted as cash at any time without losing anything.
  • Less Risky: Investments in current assets such as working capital come with less risk, for it is just for the 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 to adopt a unique accounting system.

Sources of Working Capital

  • Operational funds
  • Sales of non-current assets
  • 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 affected by various transactions regularly. The mentioned characteristics will result in limited financing. This is because the client will only be charged for the interest for just the average utilized outstanding and will be saved from having to reinvest on short-term surpluses that usually arise from low working capital at a particular time.

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4 Comments

  • Echelyn Japhy said on July 13, 2014
    This is pretty good, I appreciate it. But I need to know the characteristics and determinants of working capital in public firms
  • n.padma said on July 16, 2015
    good and short simple ans about working capital characteristics i am working as a asst prof in mba dept
  • ipsita sarkar said on May 14, 2016
    i want to know more about working capital. i am not satisfy in this ans. i am a mba student.
  • Raghunath expert adviser said on May 15, 2016
    @ipsita sarkar, hi ipsita.. Good to know that you have something to add here. What is your version of working capital? How is it different? What all you think is missing here? Working capital is vast of a thing can't be explained in few words but can be summarized in some words, that's all been done here. But we all can keep adding interesting and required points to this content. What you got to say?

    Raghunath Natarajan
    Startup Biz Hub - Advisor (Staff)

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