Working capital is the amount of money that circulates within a business which is used for payment of day to day expenses and short term debts.
The Working Capital Cycle |
Reasons for shortage of working capital
- Purchase of unnecessary fixed assets
- Overestimation of sales
- Underestimation of expense
- A decrease in demand due to seasonal factors
- Losing control over debtors resulting in bad debts
- Changes in economic condition
Methods of improving working capital
- Reducing credit sales and increasing credit purchase
- Taking short term loan from banks such as overdraft
- Selling unutilized fixed assets
- Collecting money from debtors at a faster rate
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