The working capital, also known as net worth capital is the money that a company needs for managing it’s short term expenses. It is calculated as a difference between an organisation’s current assets and its current liabilities. Working capital is a measure of the operational efficiency, liquidity and short-term financial health or solvency of the company.
The worthiness of an organisation’s working capital is subject to the industry in which it engages, its link with its suppliers and customers. Few other factors to be considered are:
- Current Assets and how fast it can be liquidated- If the company’s assets are liquid cash and cash equivalents, a little working capital is sufficient. But if the current assets have slow-moving items, then a large amount of working capital is required.
- Type of company’s sales and how customers’ pay- If a company is into online sales and the customer’s pay with a credit card option. At the time of payment, only a small amount of working capital is enough. But if a company has a credit duration of 60 days and the suppliers should be paid in 30days, then the company requires a large amount of working capital.
- No borrowing and approved credit line- This point helps the company to utilise a small amount of working capital.
Working Capital Formula:
Working capital = Current Asset – Current Liabilities
Example of Working Capital
XYZ Company Current Assets:
- Fund in the bank: ₹1,00,000
- Pending accounts receivables: ₹4,00,000
- Inventory: ₹5,00,000
Total current assets = ₹10,00,000
XYZ Company Current Liabilities:
- Pending accounts payable: ₹3,00,000
- Temporary debt due payments for this year: ₹30,000
- A section of expended due debt for this year: ₹25,000
- Other accrued expenses for this year (e.g. rent, permanent salary, etc.): ₹4,00,000
Total current liabilities = ₹7,55,000
Working Capital of XYZ Company= Current Assets – Current Liabilities
= ₹10,00,000 – ₹7,55,000
The above mentioned is the concept, that is elucidated in detail about ‘What is working capital in accounting?’ for the Commerce students. To know more, stay tuned to BYJU’S.