Working Capital

WORKING CAPITAL

The capital required for a business is of two types: these are fixed capital and working capital. Fixed capital is the capital required for acquiring fixed assets such as land, building, plant and machinery etc. Working capital refers to the funds needed to meet the day-to-day operations of the business like payment for the purchase of raw materials, payment of wages and salaries, payment of overhead expenses and so on.

Meaning of Working capital 

Working capital is the funds requirement for day-to-day operations. A business need to carry on certain amount of raw material of all sorts so that commencement of production is not delayed for want of raw materials, certain amount of work-in-progress so that production operations go smoothly, certain amount of finished goods so that the supply to the market is not hampered by fluctuations in production, certain amount of book debts so that sales take place continuously and certain amount of cash and bank balance for meeting daily routine payments and for providing unforeseen contingencies. In other words, working capital refers to the investment in the current assets of the business. Working capital is also referred to as the revolving capital as current assets and current liabilities are converted from one form to other and again converted back to its original form and reconverted into other on and on. Hence it is also called as revolving capital or floating capital.

Concepts of Working capital 

There can be two concepts of working capital, namely gross concept and net concept. The term gross working capital means the total current assets. The term net working capital is the difference between current assets and current liabilities. For the purpose of working capital management, Net working capital can be said to measure the liquidity of the firm. The term Net working capital can alternatively be defined as that part of the current assets which are financed with long-term funds. This...