Disadvantages Of Zero Working Capital

2.2.1(b)(iii): Zero Working Capital

Zero working capital represents the equality between current assets and current liabilities at all times. On the basis of the amount of current assets and current liabilities the net working capital may be positive or negative. It is seen that there are neither positive nor any negative working capital; the total of the current assets may just be equal to the total of current liabilities. This is called zero working capital. In the situation of Zero working capital Total Current Assets are equal to Total Current Liabilities

Working capital is used to purchase inventory, sell goods on credit, collects accounts receivable, and then again purchase inventory. To avoid surplus investment in current assets, firms

It is difficult to implement the concept of zero working capital. The most of the Customers are reluctant to pay the advance, but may even demand delayed payment. It is seen that Suppliers usually offer industry-standard credit terms to their customers, and will only be willing to accept longer payment terms in case of higher product prices. It is difficult to accept a just-in-time demand-based production system in those industries where competition is based on immediate order fulfillment where on hand inventory is essential. Though there is no inventory in a service industry but there are plenty of employees, who are normally paid faster than customers are willing to

This type of working capital is referred by Tandon committee as Hard Core Working Capital. This is a smallest part of working capital, which is required to be maintained by every business at any point of time, in order to carry on the business on the permanent and uninterrupted basis. This is the lowest amount of current assets required on long-term basis over the whole year. Proper utilization of existing fixed facilities of the firm depends on minimum current assets which is called permanent or fixed working capital. The least amount of stock, cash and bank balance and lowest amount other current assets jointly formed permanent working capital. This capital is financed by long-term sources of funds. This investment in different current assets is of a permanent nature. Thus, we find that a part of the amount invested in current assets is as permanent as the investment in fixed assets. This capital remains constant in gross level but the value of its components may differ from each other. There exists a positive correlation between hard core working capital and size of a business. It is that part of total current assets which is not changed due to variation in sales. A minimum level of cash, inventories, and accounts receivables is always retained in the business even if sales are decreased to a minimum. This amount is called permanent working capital. Permanent Working Capital is the amount of working capital