The amount of funds or capital required to cover the operating cost is defined as Working capital. The capital required by the business is of two types:
The capital required for investing in the long term business investments for production in the form of purchase of fixed assets such as building, plant, machinery, furniture etc is known as Fixed Capital. Capital is permanently blocked by investing in these assets.
The capital required for short term reason such as purchase raw material, payment of day to day needs of organization, routine business expenditure, payment of salaries, wages, taxes etc are called as Working capital. The capital required for financing the short term requirements or the current assets is referred as working capital.
The investment in current assets is known as Gross working capital and the difference between the current assets and current liabilities is known as Net working capital, which can be either positive or negative.
|NET WORKING CAPITAL|
|(A) Current Assets|
|Cash in hand||XXX|
|Cash at Bank||XXX|
|Inventories of Stock|
|Short Term Investments||XXX|
|Total Current Assets||XXXXX|
|(B) Less: Current Liabilities|
|Short term Loans, advances and deposits||XXX|
|Total Current Liabilities||XXXX|
|Working Capital (A - B)||XX|
The cycle of working capital from generation of cash to disbursement of cash is depicted below:
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