Question

Write a 500 words  paper in which you explain how an organization finances its working capital.

Answer 1

Working capital is the amount of liquidity or the amount of money a organization is able to spend safely . It can be calculated as the subtraction between current assets and current liabilities . This shows that how much the business is having as liquidity to them for the paying off there short term borrowings .

The working capital is the most important element of a business to know the status of the business that who it is running and how much amount liquidity they are having in the form of assets and liabilities like bank borrowings , loans , mortgages , account payable and many more . There are two types of working capital in the organization i.e.

permanent working capital -- In the permanent working capital the amount of capital is required for the business to be in a running position is the permanent in nature . It is required every time till the business is in position to survive .

temporary working capital --- Whereas , the temporary working capital is the seasonal working capital which is required in high rate specifically at the seasonal time . For around a month or two this working capital is required to run the business .

To finance the organization with the working capital they use to there assets and the liabilities as the source of finance . Firstly , they use to calculate the amount of working capital they are having after that they will decide how much amount they can finance with there assets like tangible assets , real estates ,machinery , investments and so on where as they will decide as they can generate the working capital by loans , accrued expenses , mortgages and so on . With this way an organisation can finance there working capital , both the permanent and temporary working capital .