Working capital is required for day to day transactions of the business entity. It is current assets minus current liabilities called as net working capital.
What is working – capital?
It is required to use fixed assets profitably. It is a fund requires running the business with available resources.
It is the fund and plays an important role in any business entity. It is essential because to carry out the day-to-day business operations. Financing for Business should be maintained at optimum level in any situations.
In simple words, Funds are also needed for short term for the purchase of material, make payments of wages and other day to day expenses etc. These funds are known as working fund.
Net Working – Capital
It is current assets minus current liabilities. It can be positive or negative. A positive Net Working Capital indicates the excess of current assets over the current liabilities. A negative Net Working Capital is a qualitative concept and indicates the liquidity position of the firm.
This is a qualitative concept. It can be classified n the basis of time factor.
It may be two, which is referred to as –
• Permanent and
• Fluctuating Working – Capital
Permanent capital is the minimum level of investment required in the working capital of the business at any point of time. It is also called as fixed working capital.
Fluctuating capital represents is over and above permanent funds. It is short term investments. It is also called as temporary this capital. It is extra capital is needed to sustain the change in production and sales level. It created by the firm to meet liquidity requirements that will lost only temporarily.
Working – Capital Formula
NWC= current assets – current liabilities
Current assets are those assets which can be converted into cash within in a short duration. Generally less than one year.
Current assets are inventories or stock, debtors, cash in hand, cash at bank, prepaid expenses, loans and advances, marketable securities or investments.
Current liabilities are those claims of outsiders, which are expressed to mature for payment within one accounting year. It falls due for payment within one year.
Current liabilities are trade creditors, outstanding expenses, tax provision, proposed dividend, short term loans, bank overdraft, and cash credit.
Managing this Capital should be par with industry average and business requirements. Working Capital Analysis is more important for business firm to manage properly and use effectively without any delay and kept as idle funds.
Originally posted 2015-03-18 01:17:46.