Generally explained as current assets within the business entity, the working capital would encompass all stocks, cash, debtors, and anything linked to the company. Though these working capital figures may vary through time, calculations should be done as estimates to ensure there is always sufficient working capital for the smooth running of the company or business entity.
The following are some of the factors that would determine or dictate the working capital needed to ensure the business is run smoothly and at its optimum:
If the business entity is based on a product that requires some raw materials then the stock of such material should be available.
The working capital also has to take into consideration that those materials are always be available and ready to be used. This can only be feasibly facilitated if there is a proper working capital to tap into when stocks of such raw material are on the low side.
The time frame needed to actually produce the goods or services. Ensuring that the method used is both cost effective and time effective would then make the working capital functional rather than not.
Credit terms from suppliers also affect the working capital that needs to be in place to ensure the balance is kept even if the credit terms are not really adhered to. Likewise the credit terms offered to the customers also factors heavily in the working capital platform. All these should be considered in relation to each other, thus ensuring the eventual calculation of the working capital is suitable and enough to weather any situations as it unfolds.
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Estimated sales for the month are also other elements to be considered, when drawing up the working capital layout. Although just estimates and projections are given, suitable working capital amounts can be forecasted. Profit margins are also taken into account for such estimations to be complete.