What is working capital? How is it calculated? Discuss five important determinants of working capital requirement.

Working capital is that part of firms’ capital which is required for financing the short term or current asset. The working capital is also known as revolving capital or circulating capital or short term capital.

It is the amount of funds needed to meet the day to day operations of a business; it can be described as the excess of current assets over current liabilities.

Calculation of Working Capital

Working Capital = Current Assets – Current Liabilities

Determinants of working capital are stated below

1) Nature of business - It means that whether the firm is a trading firm or a manufacturing concern. The manufacturing concern has a lengthy operating cycle, so it needs more working capital as compared to a trading firm.

2) Volume of business - Big businesses need higher working capital than the small ones.

3) Credit period - It means the credit period allowed by creditors and allowed to debtors. If creditors allow more credit period then less working capital is required and vice a versa.