Working Capital is the cash needed to pay for the day to day operation of the business. Along with long term investments , business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working Capital’. Hence, the management of Working Capital is very important for the smooth running of business. Calcution of Working Capital
Working Capital of a company is the difference between the Current Assets and the Current Liabilities of the company.
Working capital=Current Assets-Current Liabilities
Current Assets: Assets of the business held in the form of cash(e.g cash at the bank) or that can be quickly turned into cash. Current Assests
Debtors Investments Current Liabilities: Money owed by a business organization which is to be paid within next 12 months Current Liabilities
Trade Creditors Dividends
Taxation Short term loans Circulating capital – working capital is also known as circulating capital or current capital.’ “The use of the term circulating capital instead of working capital indicates that its flow is circular in nature.”
Structure of Working Capital
The different elements or components of current assets and current liabilities constitute the structure of working capital which can be illustrated in the shape of a chart as follows:
Working Capital Cycle makes it clear that the amount of cash is obtained mainly from issue of shares, borrowing and operations. Cash funds are used to purchase fixed assets, raw materials and used to pay to creditors. The raw materials are processed; wages and overhead expenses are paid which in result produce finished goods for sale. Working Capital circulation is like the blood circulation in the human body as once it stops the whole business becomes lifeless.
Classification of Working Capital
Working Capital can be classified in various ways.
Conceptual classification – There are two concept of working capital viz., quantitative and qualitative. The quantitative concept takes into account as the current assets while the qualitative concept takes into account the excess of current assets over current liabilities. Deficit of working capital exists where the amount of current liabilities exceeds the amount of current assets. The above can be summarized as follows: (i) Gross Working Capital = Total Current Assets
(ii) Net Working Capital = Excess of Current Assets over Current Liabilities (iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets. Classification on the basis of financial reports – The
information of working capital can be collected from Balance Sheet or Profit and Loss Account; as such the working capital may be classified as follows:
(i) Cash Working Capital– This is calculated from the
information contained in profit and loss account.
This concept of working capital has assumed a great significance in recent years as it shows the adequacy of cash flow in business. It is based on ‘Operating Cycle Concept’s (ii) Balance Sheet Working Capital– The data for Balance Sheet Working Capital is collected from the balance sheet. On this basis the Working Capital can also be divided in three more types, viz., gross Working Capital, net Working Capital and Working Capital deficit.
Classification on the Basis of Variability – Gross Working Capital can be divided in two categories viz.,(i) permanent or fixed working capital, and (ii) Temporary, Seasonal or variable working capital. Such type of classification...