Management Accounting - Working Capital
Working capital is defined by experts as follows -
“Working capital is the amount of funds necessary to cover the cost of operating the enterprises.”
“Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables in to cash.”
Broadly, there are two types of capital required for a business:
- Fixed Capital
- Working Capital
Fixed capital requires investing in long term investments of business to create production facility through purchase of fixed assets such as building, plant, machinery, furniture etc. Investment in these assets means permanent blockage of capital or for a long term fixed term blockage of funds.
Capital is required for short term purposes to purchase raw material, payment of day to day needs of organization, routine business expenditure, payment of salaries, wages, taxes etc. These funds are called working capital. Working capital refers to capital to finance short term or current assets such as cash, securities, debtors and inventories.
Gross Working Capital and Net Working Capital
Gross working capital means the investment in current assets, whereas the Net working capital means the difference of current assets and current liabilities. Net working capital can be 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|
Working Capital Cycle
Generation and disbursement of cash is carried out in the manner depicted by the following diagram: