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if Debtors payment is 60 days then what is working capital
of software company ???
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Answer Posted / bloody idiot
Working Capital is nothing but Current Asset Less Current
Liabilities, it is represented by Current Ratio.
The reason behind calculating Working Capital is to assess
how much is the Debt Collection period vis a vis its
disbursement to creditors at large.
Behind this concept lies a logic that, if a firm is
producing and selling a product, it is investing some money
into its Manufacture, if the firm is able to recover those
Funds from Customer within time, it need not use outside
(Borrowed Funds / Owner's equity) into running daily
operations of the Business. So the less the Working Capital
the better for the firm since it's outside requirements of
funds and also Cost of such Funds (Interest) comes down.
The Creditors ( As Current Liabilities) are deducted since
it represnts firm's efficiency in delaying payments to its
suppliers, which denotes that firm is able to manage
(Current requirement of Working capital - financed from
outside funds) its borrowed WC Funds more efficiently.
Current ratio as a standard of 2 : 1 need not be always
correct, suppose if a firm is able to recover its'
outstandings from debtors at efficient speed and delays
payments to Suppliers, it will always have a below standard
Ratio. And this ratio will not necessary mean that Co. is
unable to generate any sales(It is just able to reover it's
Sales/invested funds at greater speeds than payment
outflow.So it depends on circumstances, all i want to say
is that achiving 2:1 ratio alone does not mean a co. has
solved all its problems,this ratio can be achieved by high
amount of Unrealisable Debtors also (Debtor's Analysis is
very important)
In the question asked, only Debtors payment is given, I
will give answer like this
" I assume that Suppliers is Nil (this being a Software
Company) So Creditors represented by Current Liabilities is
Nil. Hence Working Capital Requirement or Gross W.C. = Net
W.C. = Current Assets less Current Liabilities = 60 Days(2
months).
This means A Company must use borrowed/outside funds to
work around its routine operastions for 2 months, until and
unless it recovers the funds from Debtors.
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