Working capital requirement
Fixed assets alone cannot generate sales and profit. The managerial activities required to operate this assets in order to generate sales and profit are referred to as the firm’s operating activities. These activities require investments in the form of inventories and trade receivables that are generated by the firm’s operating cycle.
Operating cycle starts with procurement, the act of acquiring raw materials. It is followed by production, during which raw materials are transformed into finished goods. The cycle continuous with the sales of these goods, ending when cash is collected from customers. The cycle repeats itself as long as the firm’s production activity continuous.
Working capital is of two types; viz. Gross working capital and Net working capital. Gross working capital refers to the firm’s investment in current assets. Deducting current liabilities from Gross working capital results in Net working capital.
There are two primary sources of capital available to firms: the equity capital provided by owners (shareholders) and the debt capital provided by debt holders (lenders). Debt can be of short term, due to be repaid within a fiscal & of long term, due to be repaid after that fiscal. Thus, the firm’s total capital employed can be classified either as equity and debt capital or as Long-term financing and Short-term financing.
Fixed assets alone cannot generate sales and profit. The managerial activities required to operate this assets in order to generate sales and profit are referred to as the firm’s operating activities. These activities require investments in the form of inventories and trade receivables that are generated by the firm’s operating cycle.
Operating cycle starts with procurement, the act of acquiring raw materials. It is followed by production, during which raw materials are transformed into finished goods. The cycle continuous with the sales of these goods, ending when cash is collected from customers. The cycle repeats itself as long as the firm’s production activity continuous.
Working capital is of two types; viz. Gross working capital and Net working capital. Gross working capital refers to the firm’s investment in current assets. Deducting current liabilities from Gross working capital results in Net working capital.
There are two primary sources of capital available to firms: the equity capital provided by owners (shareholders) and the debt capital provided by debt holders (lenders). Debt can be of short term, due to be repaid within a fiscal & of long term, due to be repaid after that fiscal. Thus, the firm’s total capital employed can be classified either as equity and debt capital or as Long-term financing and Short-term financing.
