This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
In the preceding chapter the necessity for adequate working capital in most lines of business has been emphasized. The question as to what is to be considered "adequate" in any given case, however, has been left open. It would be too much to expect that this chapter should present an exact arithmetical answer, or even a formula for arriving at the answer. There are too many variable factors to be considered. We can, however, list and discuss the most important of these factors, and perhaps in this way throw a little additional light on one of the most difficult and most vital problems in the field of business financing.
Following are the factors which require chief consideration when the amount of working capital required by a given enterprise is to be calculated:
4. Terms of sale.
6. Seasonal variations in the business.
It may be well to repeat at this point the definition of working capital as "excess of current assets over current liabilities." In transportation and other enterprises which do not carry any excess of assets over liabilities, there is no working capital; in manufacturing enterprises it is generally considered that the proportion of assets to liabilities should not be lower than 100 to 75, or 100 to 80. Sometimes the same ratio is expressed in the reverse order, and it is stated in mortgage indentures that current assets shall never be less than 133 1/3% or 125% of current liabilities. These ratios are not in themselves fixed and final standards. It would be far better to determine the amount of working capital in some more definite manner; if the amount is sufficient, we may be certain that the ratio of current liabilities to current assets will always be well within the limits of safety.