7/24/2019 What Are the Components of Working Capital

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Cash. Cash is one of the most liquid and important components of

working capital. Holding cash involves cost because the worth of cash

held, after a year will be less than the value of cash as on today. Excess of

cash balance should not be kept in business because cash is a non-

earning asset.-Hence, a proper and judicious cash management is of

utmost importance in business.

Marketable Securities.These securities also dont give much yield to

the business because of two reasons, (i) Marketable securities act as a

substitute for cash, (ii) These are used are temporary investments. These

are held not for speculative balances, but only as a guard against possible

shortage of bank credit.

Accounts Receivable.Too many debtors always lock up the firms

resources especially during inflationary tendencies. This is a two step

account. When goods are sold, inventories are reduced and accounts

receivables are created. When payment is made, debtors reduce and cash

level increases. Thus, quantum of debtors depends on two things, (i)

volume of Credit sales (ii) average length of time between sales and

collections. The entrepreneur should determine the optimal creditstandards. An optimal credit policy should be established and the firms

operations should be continuously monitored to achieve higher sales and

minimum bad debt losses.

Inventory.Inventories represent a substantial amount of firms assets.

Inventories must be properly managed so that this investment doesnt

become too large, as it would result in blocked capital which could be put

to productive use elsewhere. On the other hand, having too little or small

inventory could result in loss of sales or loss of customer goodwill. An

optimum level of inventory, therefore, should be maintained.