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Define Working capital requirement

Working capital requirement: Is a financial term known as WCR, which is used to judge the operational liquidity of the business and it is a part of operational capital. A firm in spite of having a good profitability and assets may not have a good liquidity position to meet its day-to-day needs. The estimation of working capital requirement ensures that a firm is always able to continue its operations without any hindrances. A positive working capital ensures that the firm has sufficient funds to meet both the short-term debt and continue its operations. On the other hand a negative working capital means that the firm is unable to meet its short-term obligations and will therefore be not able to carry its operations regularly. The management of working capital involves managing inventories, accounts receivable, cash, and account payables. The components of working capital requirement are as following:

Working Capital Requirement = Operating Assets – Operating Liabilities

WCR = (Accounts receivable + Inventories + Prepaid expenses)-(Accounts payable + Accrued expenses)

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