Working capital refers to the amount of money or finance require to run day-to-day business expenses or to buy the office equipments for daily use. working capital can also be defined as the source of running the business or organisation on day-to-day or routine basis. it is classified in two parts which are discussed below:
- There are two concepts or senses used for working capital. These are :
- Gross Working Capital:
- The concept of gross working capital refers to the total value of current assets.
- Simply put – Gross Working Capital = Total Current Assets
- Net working Capital:
- The net working capital is an accounting concept which represents the excess of current assets over current liabilities.
- Excess of current assets over current liabilities, thus, indicates the liquid position of an enterprise.
- Net Working Capital = Current Assets-Current Liabilities
- Concept of Operating Cycle:
- Working capital is required because of the time gap between the raw material procurement to conversion of sales into cash.
- This time period gap above is known as operating cycle.
- Thus, operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods.
- The duration of the operating cycle for the purpose of estimating working capital requirements is equivalent to the sum of durations of each of the stages (as seen above) net of credit period allowed to us by the creditors for payment.
So these are the following definitions and types of working capital which is normally required to run our business and to deal with day-to-day expenses.
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