Define working capital. Why does a business need a working capital?
Working capital is defined as the amount of money required to fund the day to day routine operations of a business.
Working capital is required, especially during the start-up period, to pay for the expenses and debts as and when they arise. It is more significant during the start up period because the business will not yet be ready to make profits (it takes some time for the business to start earning profits, not on the first day) and the break even point is not yet reached.
The businesses need a working capital for
- For procuring the fixed assets or long term assets. Assets like
etc are long term assets and will last for a longer period of time. Once procured, these assets are put to operation either for production or sales or service. It should be noted that these long term assets are not sold or traded. So, the investment on these assets does not result in cash inflow for the business.
- For purchasing the
- insurance premium
- packaging material
- raw materials
- rent on land or building
- paying utility bills
- and for many other expenses.
Thus this is the money needed for carrying out the day to day operations of the business.
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