The distinct features of working capital can be considered under the following captains.

1. Constituents of working capital in terms of Assets & Liabilities (or resources and uses)? The distinction between gross working capital and net working capital.

2. Effects/results of under-capitalisation or over-capitalisation.

3. Norms of arriving at quantum of working capital is needed? The ideal ratio or proportion between the extent of current assets & current liabilities.

4. What are the ideal means of procuring working capital? Should it be entirely owned by way of equity capital or borrowed wholly through debt capital? If borrowing is to be done how much to borrow?

5. What are internal sources of working capital or spontaneous sources of working capital in addition to internal accruals of retained profit?

6. How to formulate working capital policy?

7. How the advancements in technology in telecom & use of computers influence working capital management? What are the challenges to working capital management resulting from globalization and advent of fierce competition?

8. What controls are needed for the effective utilization of working capital resources? In particular those relating to management of cash, account receivables, levels of Inventory of raw-materials, finished goods and stores,

Working Capita is identified in two categories. A core portion is financed exclusively through long-term liabilities and is identified as 'Net Working Capital'. The variable or additional needs of financing current assets are secured by short-term market borrowings or working capital credit facilities from banks. The aggregate of working capital covering both long term and short term resources is called 'Gross Working Capital'. While formulating the cost of the project, it is customary to provide towards margin for working capital, which inducts of net working capital. Such margin may be around 25% of the Gross working capital calculated at that stage. Net working capital can be arrived at by calculating the difference between the long term sources of funds and long term uses of funds or by calculating the difference between the Current Assets and Current Liabilities. Thus net working capital may be:

Long term sources of funds minus long term uses of fund
or
Currents Assets minus current liabilities.<

Conventionally the quantum of working capital is linked to the quantum of sales turnover and Conventionally the quantum of working capital is linked to the quantum of sales turnover and certain other factors like the type of business, its seasonality, the length of its cycle of a single operational turnover etc. However irrespective of turnover and other factors a base minimum of liquid funds is needed always to sustain the business as along as it is considered a live or running business. As this base minimum level of current assets is deemed a continuous/constant factor, this portion of working capital is deemed at par with long term assets and financed through such sources.

In addition to the Net Working capital the business concerns also secures other internal sources to be utilized for working capital needs, termed 'Other Liabilities. These sources are created automatically in the process of operating the business activity and are not secured through specific efforts of the finance manager. Hence these sources are also called "spontaneous sources of working capita". Some of them are:

• · Sundry Creditors for goods purchased A business always gets this facility from its suppliers.

• · Sundry creditors for Expenses. The overheads (like salary, freight, Clearing agents charges etc. charges etc.) for each period is settled in the first week of the next month

• · Trade advances : It is customary for the firm to obtain a certain amount of advance payment from buyers against their order for goods.

• · Provisions etc. Provisions are accounted for expenses accountable for a period but not yet due for payment. It also includes annual provisions made towards depreciation.

As per the concept of financial leverage it is considered more prudent to fund working capital partly through debt. Normally in manufacturing and trading concern this is done by availing a working capital borrowing from a commercial bank on the collateral of the firm's current assets. In case of service organisations they may not have tangible current assets covering different inventories. But they can still give a charge on their receivables and raise a working capital borrowing to cover their working expenses.

Current assets of a business consist of the following: -

1. Cash & Bank Balance

2. Stocks

3. Receivables

4. Stores & Spares

5. Loans & Advances

Working capital is also used to meet operating expenses like payment wages, electricity and water charges, Carriage inwards. These are transitory in nature, as these expenses will eventually result in additional finished goods or receivables. All such expenses are incurred in the promotion of the manufacturing, trading or service activities.

1. Investments in current assets constitute a substantial portion equal to 3 to 4 month sales turnover of the business.

2. The level of holding of different working capital components is always expressed equal to a fixed period of sales turnover. As sales turnover during different parts of the year may vary, this would automatically be regulating in the working capital needed to finance these assets from time to time according to variable levels of production and sales.

3. An efficient management of working capital will reflect in shorter life span and speedier rotation of different current assets on account of quick transformation of such assets like cash into Raw material; raw material into finished goods, finished goods into receivables and receivables back into cash. A single cycle of transformation of cash moving about different stages and coming back to its original form after a single circulation is called a turnover. The larger the number of such turnovers per year, the smaller will be the need for working capital needed in relation to the annual sales due to higher velocity of use of resources.

4. The concept of working capital turnover implies that operations in working capital management are repetitive and revolving. It is a continuous task for the finance manager.

Extent of working capital needed for a business is calculated first by estimating the quantity/value of annual sales and on that basis to arrive at the quantity and value of each item of current asset, based on maximum holding in terms of number of months of sales value. This is done separately for raw materials, stores, finished good and receivables. The aggregate value of current assets at its peak level needed to operate the business is thus calculated. This represents the peak value that current assets can reflect in the business. From this the amount of net working capital and 'other liabilities' held by the firm are deducted to arrive at the quantum of working capital borrowings to be negotiated.

Since working capital is needed to finance holding of currant assets, how much quantity of each item of current assets like raw material, finished goods, cash, receivables should be pegged? For example the company in order to meet its production plans has to hold some quantity of raw materials, in the form of inventory, as there will be a time lag from the moment of placing an order for raw materials with suppliers till the same are received by the company. The quantum of raw materials needed by the company inter alia depends on its production target, the availability of raw materials in the market, the time-gap between order and delivery, and the economic quantify to be purchased to avail of price benefits, discounts or to reduce transport costs etc. The quantum of finished goods inventory a company carries is basically determined by the degree of accuracy in forecasting sales demand, the ability to meet sudden and unforeseen spurts in the demand for finished goods etc. The Company fixes norms or holding levels for each item of its current assets, based on the working capital cycle, more popularly known as the operating cycle.

The operating cycle of a firm begins with the induction cash towards acquisition of raw materials and ends with the collection of receivables and getting back the cash invested. This cycle may be divided into four parts.

1. Raw material and stores storage stage

2. Work-in-process stage

3. Finished goods inventory stage

4. Debtors' collection stage.

Thus an ideal working capital management presupposes an efficient inventory or material management, based on norms of holding or levels of each item of inventory expressed as equal to so many days of its sales turnover. Generally in the conditions of Indian industry 15 days finished goods, one month raw-material and one month receivables and 7 days stock in process are considered, but the norms differ from industry to industry. The objective of holding the minimum, but adequate inventory underlies the principle of trade-off between liquidity and profitability. Based on the holding period calculated from the operating cycle analysis, investment in various current assets is calculated. To this sum a desired cash balance may be added to get an estimate of working capital needs. Information on operating cycle is not only helpful in forecasting working capital requirements, but also in effecting proper control thereof.