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Working capital and it's purpose

Meaning of working capital
Working capital refers to funds required to be invested in the business for a short period usually up to 1 year. It is also known as short-term capital or  circulating capital.
Purpose of working capital
Working capital is required to meet day to day operating expenses and for holding stocks of raw materials, spare parts ,consumables ,work in progress and finished goods and book debts. More specifically working capital is needed :

  • To holder stock of raw materials for such a period so as to facilitate  uninterrupted supply of raw materials to production process 
  • to hold a stock of work in progress for process period
  •  to hold stock of finished goods for such a period so as to meet the demands of customers on continuous basis and sudden demand from some customers 
  • to grant credit to its customers for marketing and competitive reasons 
  • to hold cash balances to meet the manufacturing office and administrative selling and distribution expenses ,taxes etc.
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