What is Role of Working Capital in Business

Working capital is the life blood and nerve centre of a business. Jus as circulation of blood is essential in the human body for maintaining life. Working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. However, it must also be noted that working capital is a means to run the business smoothly and profitably, and not an end. Thus, concept of working capital has its own importance in a going concern. A going concern, usually, has a positive balance of working capital, i.e., the excess of current assets over current liabilities, but sometimes the uses of working capital may be more than the sources resulting into negative value of the working capital. This negative balance is generally offset soon by gains in the following periods. A study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.

Analysis of working capital can be conducted through devices 

    Ratio Analysis
    Fund Flow Analysis
    Budgeting

Ratio Analysis

 A ratio analysis is a simple arithmetical expression of the relationship of one number to another. The technique of ratio analysis can be employed for measuring short term liquidity or working capital position of a firm.

Fund Flow Analysis

Funds flow analysis is a technical device designated to study the sources from which additional funds were derived and the use to which these sources were put. It is an effective management tool to study changes in the financial position of a business enterprise between beginning and ending financial statements dates. The fund flow analysis consist of

    Preparing schedule of changes in working capital

    Statement of sources and application of funds

Working capital Budget

A budget is a financial and quantitative expression of business plans and policies to be pursued in the future period of time. Working capital budget, as a part of total budgeting process of a business, is prepared estimating future long term and short term working capital needs and sources to finance.