[Tech.Jargon]: Understanding the Concept of 'Working Capital'

HAVE ANY IDEA WHATS THIS 'WORKING CAPITAL' IS ALL ABOUT???

If not, then read on... And if yes, then also go through! :-)

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Any construction firm, or in that matter of fact any kind of enterprise, is faced with a continual exercise of a periodic nature that involves deciding upon the amount and composition of the ready available funds in liquid form, which can be made available for meeting the day-to-day requirements of that enterprise. Such liquid capital is always planned apart from the fixed or permanent capital invested over the assets or businesses on a semi-permanent or permanent basis for longer durations of time, and with the intended purpose of earning long-term gains and revenue.

As such, the part of the total capital, which is left out of the permanent capital so as to meet the functional and day-to-day operational requirements, is termed as the Working Capital.

Need of Balancing Between Working & Total Capital

It is of utmost importance for the management and the managers to understand keeping the balance between the extents of the Working Capital with respect to the Total Assets of a particular enterprise.

The greater the relative proportion of the Liquid Assets, the less is the risk of running out of cash for meeting the usual work chores on a day-to-day basis; all other things being equal. However, it should also be understood that the more the assets are kept in liquid state, the lesser is the overall percentage of the totally available assets into the main business, thereby reducing the scope of the probable gains.

On the other hand, reducing the percentage of liquid cash enhances the enterprise’s chances of profitability, but at the same time also increases the risk of falling short of the ready available cash in hand, which may sometimes be required to cater for investing in the new project bids, as well as chances of increasing the risk of dishonoring the maturing in-house obligations also.

Changing Nature of Working Capital

One of the important features of the Working Capital is that it constantly changes its form from enterprise to enterprise depending upon a certain time period, type of business, nature of jobs in hand, nature of resources required to put in place, billing cycles, etc. As such, planning and arrangement for this form of capital needs to be continually reviewed and revised on a periodic basis analyzing the present commitments vis-à-vis the scheduled obligations of the near future.

Basics of Planning for Working Capital

Like mentioned in the previous paragraph, it needs a constant endeavor to plan for the working capital. This planning has to be based upon certain factors involving the enterprise’s business goals, operations, targeted profitability, risk appetite, etc.

The sources, which can be thought of towards planning the working capital, can be:

  • Net gains and revenue from operations
  • Sale of fixed assets
  • Raising long term debt
  • Additional issue of equity shares to the public and/or financial institutions
  • Retirement of current liabilities below book value

These measures can help generating additional capital for the enterprise, which in turn can be allocated into required present and near future liquid capital requirements.

Determinants of Working Capital

Towards the end of this article, it also becomes essential to know the major determinants controlling the decisions of the corporate managements while planning for their enterprise’s working capital. A few of these major determinants are:

  • Nature of business
  • Seasonality and the product pattern.
  • Construction process
  • Turnover of circulating capital
  • Prospective growth and expansion plans of the enterprise
  • Business cycle fluctuations
  • Receivables and payables of the enterprise

Inference

The readers of this article here at bricks-n-mortar, by now, must have got an idea on the concept and importance of the Working Capital in a business scenario. Cash planning is an integral and essential part of the construction industry management so as to keep the targets becoming a reality, and to meet the functional cash requirements at the same time. In a nutshell, enterprises which do not give due importance to working capital planning, are surely doomed not to survive for long. As such, adequate attention as well as importance must be drawn on this aspect by all professionals who want to grow big in their business and/or work fields.



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[Filed under "Tutorials, Technical-Jargon" category(ies) by Team@Bricks-n-Mortar.com]

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