What is meant by working capital?
What is meant by working capital?
The capital invested in current or working assets such as stock of materials and finished goods, accounts receivable, bills receivable, short-term securities and cash or bank balance for meeting day-to-day expenses is known as working capital or current capital. It represents the investment for a short period. The term 'working capital' is used in two senses, namely gross working capital and net working capital.
(i) Gross Working Capital: It is the total value of current assets. The amount of gross working capital indicates the total funds available for financing the current assets. It is a quantitative concept, which fails to reveal the correct financial position of a company.
(ii) Net Working Capital: It represents the excess of current assets over current liabilities. Net working capital is a qualitative concept, and it reveals the soundness of current financial position. It shows a firm's ability to meet its current obligations as they fall due for payment.
The capital invested in current or working assets such as stock of materials and finished goods, accounts receivable, bills receivable, short-term securities and cash or bank balance for meeting day-to-day expenses is known as working capital or current capital. It represents the investment for a short period. The term 'working capital' is used in two senses, namely gross working capital and net working capital.
(i) Gross Working Capital: It is the total value of current assets. The amount of gross working capital indicates the total funds available for financing the current assets. It is a quantitative concept, which fails to reveal the correct financial position of a company.
(ii) Net Working Capital: It represents the excess of current assets over current liabilities. Net working capital is a qualitative concept, and it reveals the soundness of current financial position. It shows a firm's ability to meet its current obligations as they fall due for payment.
