Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
Explain the Characteristics of Working Capital.
✓
Answer
Introduction :
After business came into existence to keep it running working capital is required.
It is required for purchase, for production, sale, advertisement, distribution and for day-to-day administrative expenses.
Working capital is found in various forms so it is known with different names.
E.g. it is called current capital as it is invested in current assists.
When it is in production process it is called moving capital.
It increases and decreases so it is called flexible capital.
It is required for short term so it is called short term capital.
Characteristics of working capital :
Short term capital:
Working capital is required less than $5$ years so it is called short term capital.
Investment in current assists :
Working capital is invested in short term securities of business such as debtors, bills receivable etc.
Liquidity :
All current assists in which working capital is invested and is converted into cash. So it has the attribute of cash liquidity.
Less risk :
Working capital in business is for short term and is easily converted into cash. So the risk factor is less.
Changing form :
The form of working capital changes when it is employees in current assists e.g. raw material is converted into semi finished goods, semi finished goods is converted into finished goods.
Finished goods is converted into debtors and if such goods sold in cash or credit it is converted in to cash.
To pay day-to-day expenses :
Working capital is required to pay day-to-day expenses.
No depreciation :
Working capital is circulating in business so depreciation is not calculated on it.
Requirement according to type and form of business :
Working capital is required in all types of business. Its requirement differs according to nature and form of business.
Conclusion :
Chief characteristic of working capital is its liquidity. Company purchases raw material through working capital then process is carried on it.
After the goods ready for sale once again it is converted into cash and after sale once again raw material is purchased from cash.
Thus, working capital is circulating in business.
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