Even in making comparison on this basis, which is the best one to use for comparisons of different com panies, there are a number of factors which are not uni form in all cases. Comparisons would best be made for a series of years with respect to the individual com panies and the progression or retrogression reflected in them noted.
6. Relation of working capital to total asgets.—It is impossible to lay down any general rules which will aid in determining the proper relation of working cap ital to total assets. Perhaps the best rule is that the working capital should vary in 'accordance with the sales. This naturally leads to the question, "What is working capital?" Working capital is commonly understood to mean that portion of the liquid assets, free and unpledged, which a firm has available for employment in the business. In other words it is the exc,ess of liquid assets over liquid liabilities ; that por tion of the liquid assets not furnished by creditors or by temporary bank loans.
Current assets are usually acquired either thru the parting with other assets or by the creation of addi tional floating liabilities. To ignore the floating liabilities is undesirable, because a large floating debt is usually an evidence of weakness, and always may be a source of danger. Therefore, working capital should be understood to mean the excess of quick assets over quick liabilities.
7. Amount of working capital needed dep'ends upon nature of busines8.—Just as conditions in each kind of business differ, so the needs of individual con cerns in any line of business differ also. There is no doubt but that a concern handicapped by a shortage of working capital will not operate as efficiently as one with sufficient working capital at its disposal. Without proper working capital shortage of ma terial, long credit with consequent loss of discounts, and many other troubles will be encountered. The shortage in working capital may result from poor managerial or financial policy, or from the distribu tion of too great a portion of the profit in the form of dividends. Even tho a large profit has been earned in any given year it should not be distributed in the form of cash dividends at the expense of future busi ness needs.
For example, a comparatively young undertaking which is expanding rapidly, and which is requiring considerable working capital for the continuance and expansion of its business, must have a far larger amount of working capital than one which is pro gressing at a uniform rate. New business must be financed before the old business has been collected upon. A continual increase in volume of business throws a larger burden on the concern, and necessi tates corresponding increases in the amount of work ing capital.
8. No rule for amount of quick assets required by conclusion, it may be said that there is no rule that can be laid down as to the amount of quick assets which a corporation should endeavor to acquire. In a line of business in which long cred its are given to customers, it is evident that a greater amount of working capital will be needed than in those lines in which shorter credits are given. More over, if the terms of credit received by an undertak ing are comparatively short, and the terms of credit allowed to its customers are comparatively' long, a greater amount of working capital must be provided.
9. The economic status of contributors of capital to a business enterprise.—Contributors of capital which is employed in a business enterprise may be divided into four classes: Long-term creditors, such as bondholders and hold ers of notes having more than one year to run.
Short-term creditors whose debts are due in less than one year.
Lessors, leasing property to a firm for a term of years, at stated annual rentals.
The investors, the sole owner, the partners or the stockholders of a corporation, who have the control and management of the organization.
Creditors of the first class have usually a lien on the fixed property of the organization, and receive as com pensation a stated sum which is known as interest. This class comprises those who have had sufficient con fidence in the managers of the enterprise to entrust their capital to them, exacting a stated and definite rate of compensation for its use.