Fixed Capital and Working Capital

Topics: Depreciation, Inventory, Generally Accepted Accounting Principles Pages: 10 (3051 words) Published: May 12, 2011
A firm requires funds to acquire two types of assets : fixed assets and current assets .Fixed assets include land biulding , plant, and machinary , vehicles , equipment etc.These assets relatively permanent in nature and are necessary for carrying on the bussiness .Current assets ,on the other hand ,are kept for supporting day-to-day operations and keep changing during the course of the business.They liquidated within short period of time during the operating cycles of the industry and not normally exceeding one year. Current assets include cash , debtors, inventory of raw materials and finished goods , etc.Current assets constitute gross working capital.Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully with out an adequate amount of working capital.

Meaning of working capital:
Working capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the enterprise.Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.

Objectives of working capital:

Every business needs some amount of working capital. It is needed for following purposes,for the purchase of raw materials, components and spares.To pay wages and salaries.To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc.To provide credit facilities to customers etc. Factors that determine working capital:

The working capital requirement of a concern depend upon a large number of factors such as Size of business, nature of character of business, seasonal variations, working capital cycle, operating efficiency, profit level, Other factors.

Sources of working capital:
The working capital requirements should be met both from short term as well as long term sources of funds.Financing of working capital through short term sources of funds has the benefits of lower cost and establishing close relationship with banks.Financing of working capital through long term sources provides the benefits of reduces risk and increases liquidity.

The number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt. Working capital Management

Working capital is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency,...
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