What is meant by Working Capital?

The working capital is the amount of liquidity that a business has for the short-term. The difference between the company’s current assets or its current liabilities is called the working capital.

What are your current assets?

Current assets are assets that can be sold or used efficiently during the financial year.

Current assets include:

1. Cash

2. Account Receivable

3. Stock inventories

4. Prepaid liabilities

5. Stocks, mutual funds and bonds

Current liabilities could include accounts payable, inventory cost, or debts.

If a company has Rs. 2. million and the current liabilities are Rs. 1.25 lakh. It has Rs. 750,000

What is working capital?

High working capital is a sign that a company is functioning well. High net working capital indicates that the company has the resources necessary to fulfill its financial obligations.

Also, a high net capital could indicate that the company isn't using its resources to maintain high liquidity.

What happens if working capital is low

Low working capital can indicate that the company has less current assets and greater liabilities. Low net capital does not necessarily mean the company is in financial trouble. A company's working capital is a measure of its short-term financial health. However, if the company has invested heavily in something that could yield good returns, it may have lower working capital. A company that has sufficient working capital to meet its financial obligations can be considered reliable and capable of managing finance well.

Negative working capital is when the current assets are less than the current liabilities. Bankruptcy can be caused by prolonged negative net capital.

What types of working capital are there?

There are two types of working capital: Operating Cycle View and Balance Sheet View.

View of the Balance Sheet:

1. Gross Working Capital - This is the company's current assets. Current assets are assets in the balance sheet that can convert into cash within one year.

2. Net Working Capital– This is capital that can be used to manage capital effectively. It is the surplus of current assets after paying all liabilities.

View of the Operating Cycle:

1. Fixed Working Capital– Also known as permanent work capital, it is the asset's fixed value. This is the lowest amount of investment in the company's working capital.

These are further sub-divisions:

- Regular Working Capital: This is the capital that the company needs to operate smoothly.

- Reserve working capital is capital that is kept for contingencies.

- It is not part of the regular working capital

2. Variable working capital - This is the difference in net working capital and fixed work capital.

These are further sub-divisions:

- Seasonal Working Capital - It's a temporary increase of working capital because of seasonal needs.

- Special Working Capital: This is temporary increase in working capital that occurs due to a special event.