(This article explains various stages of operating cycle and concise form of a balance sheet illustrating the structure of long-term sources (LTS), short term source (STS), long term uses(LTU) and short-term uses(STU), and the Net-Working capital)
The term working capital means the sum of the funds invested in various current assets used in the operating cycle, by the industrial and trading establishments. Operating cycle means the length of time required to convert ‘Non-Cash current assets’, (like raw material (RM), work in process (WIP), finished goods (FG), and receivables) into cash. The appraisal of working capital finance means the assessment of gross working capital, net- working capital and working capital gap for assessment of working capital limits for a company.
In normal circumstances, every unit of Cash investment in working capital is converted to cash at the end of the cycle. Therefore, operating cycle is also known as cash to cash cycle or production cycle.
Various stages of operating cycle can be explained by the following diagram.
The starting point of operating cycle is cash paid towards the purchase of raw material; labour and other overheads in the production process and produce work in process. The work in process converted into finished goods. Finished goods are converted into Receivables. The receivables turned into cash. The cash again will be converted into inventories, receivables, and cash. In the other words, Gross working capital means total funds invested in Current Assets.
The structure of long-term sources (LTS), short term source (STS), long- term uses(LTU) and short-term uses(STU), Net-Working capital is explained in the following diagram of a balance sheet.
Abbreviations: CL=Current Liabilities, TL=Term Liabilities, NW=Net worth, CA=Current Assets, FA=Fixed Assets, M&NCA = Miscellaneous and Non-current Assets, ITA = Intangible Assets. In all balance- sheets total of Liabilities is equal to the total of liabilities. In our above example, we have taken the figure 100 as the total of both the sides.
Examples of the long-term source (LTS) of funds are funds from operation (retained profit), Share capital, the issue of debentures, long-term investments, the sale of fixed assets and sale proceeds of long-term investments etc.
Examples of long-term use (LTU) of funds are the purchase of fixed assets, repayment of long-term loans, repayment of debentures and bonds, the redemption of preferential shares, loss from business operations etc.