What are the components of working capital ?

The main components of working capital are :

  • 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 don't 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 firm's 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 credit standards. An optimal credit policy should be established and the firm's operations should be continuously monitored to achieve higher sales and minimum bad debt losses.
  • Inventory. Inventories represent a substantial amount of firm's assets. Inventories must be properly managed so that this investment doesn't 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.