WORKING CAPITAL

- Meaning of Working CapitalCapital

required

for a business

can be

classified

under two main categories via,1) Fixed Capital2)

Working Capital

Every business needs funds for two purposes



For its establishment



To carry out its day- to-day operationsLong terms funds are

required

to create production facilities through purchase of fixed assets such as P&M, land, building, furniture, etc. Investments in these assetsrepresent that part of firm’s capital which is blocked on

permanent

or fixed basis andis called

Fixed Capital

.Funds are also needed for short-term purposes for the purchase of

raw material

,payment of wages and other day–to-day expenses etc. These funds are known as

Working Capital Working Capital Working Capital Working Capital

.In simple words,

working capital

refers to that part of the firm’s capital which is

required

for financing short- term or current assets such as cash, marketablesecurities, debtors & inventories. Funds, thus, invested in current assts keep revolvingfast and are being constantly converted in to cash and this cash flows out again inexchange for other current assets. Hence, it is also known as revolving or circulatingcapital or short term capital.CONCEPT OF

WORKING CAPITAL

There are two concepts of

working capital

:1. Gross

working capital

2. Net

working capital

The gross

working capital

is the capital invested in the total current assets of theenterprise. Current assets are those Assets which can convert in to cash within a shortperiod normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS1) Cash in hand and cash at bank 2) Bills receivables3) Sundry debtors4)

Short term loans

and advances.5) Inventories of stock as:a.

Raw material

b. Work in processc. Stores and sparesd. Finished goods6. Temporary investment of surplus funds.7. Prepaid expenses8. Accrued incomes.9. Marketable securities.In a narrow sense, the term

working capital

refers to the net working. Net

working capital

is the excess of current assets over current liability, or, say:

NET

WORKING CAPITAL

= CURRENT ASSETS – CURRENT IABILITIES.

Net

working capital

can be positive or negative. When the current assetsexceeds the current liabilities are more than the current assets. Current liabilities arethose liabilities, which are intended to be paid in the ordinary course of businesswithin a short period of normally one accounting year out of the current assts or theincome business.

CONSTITUENTS OF CURRENT LIABILITIES1. Accrued or outstanding expenses.2.

Short term loans

, advances and deposits.3. Dividends payable.4. Bank overdraft.5. Provision for taxation, if it does not amount to approximate of profit.6. Bills payable.7. Sundry creditors.The gross

working capital

concept is financial or going concern concept whereas net

working capital

is an accounting concept of

working capital

. Both the concepts havetheir own merits.The gross concept is sometimes preferred to the concept of

working capital

for thefollowing reasons:1. It enables the enterprise to provide correct amount of

working capital

at correcttime.2. Every management is more interested in total current assets with which it has tooperate then the source from where it is made available.3. It take into consideration of the fact every increase in the funds of the enterprisewould increase its

working capital

.4. This concept is also useful in determining the

rate of return on investments

working capital

. The net

working capital

concept, however, is also important forfollowing reasons:



It’s a qualitative concept, which indicates the firm’s ability to meet to itsoperating expenses and short-term liabilities.



IT indicates the margin of protection available to the short term creditors.

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