Mathematically, working capital is the difference between current assets and current liabilities. The working capital of a company helps us in analyzing the short term financial health of a company and also is used to study the efficiency of that company.
Financing by Banks
Banks provide finance for working capital to finance the day to day functioning of the unit. This capital is generally financed through a cash credit account and the company needs to credit the sales proceeds in this account. The amount can be withdrawn within the limit as many time as required by the company. The limit that is sanctioned is valid for one year and needs to be reviewed every year.
How to read Working Capital Figures?
If the working capitals are reducing over a period of time, the company is gradually drifting towards sickness and so as with other various ratios and parameters, the trend of this capital of a company needs to be followed and not the figure of a single year needs to be analyzed in isolation. Reducing working capitals indicates that gradually the company is weakening on its capacity to repay its debts to its creditors. If the working capital is too high, it means that the company is unable to utilize its assets effectively.
