Working capital refers to the circulating capital required to meet the day to day operations
of a business firm. Working capital may be defined by various authors as follows:
1. According to Weston & Brigham - “Working capital refers to a firm’s investment in short term assets, such as cash amounts receivables, inventories etc.
2. Working capital means current assets. —Mead, Baker and Malott
3. “The sum of the current assets is the working capital of the business” —J.S.Mill
CIRCULATION OF WORKING CAPITAL
At one given time both the current assets and current liabilities exist in the business. The current assets and current liabilities are flowing round in a business like an electric current.
However, “The working capital plays the same role in the business as the role of heart in human body. Working capital funds are generated and these funds are circulated in the business. As and when this circulation stops, the business becomes lifeless. It is because of this reason that he working capital is known as the circulating capital as it circulates in the business just like blood in the human body.”
1. Gross Working Capital: It refers to the firm’s investment in total current or circulating assets.
2. Net Working Capital:The term “Net Working Capital” has been defined in two different ways:
i. It is the excess of current assets over current liabilities. This is, as a matter of fact, the
most commonly accepted definition. Some people define it as only the difference
between current assets and current liabilities. The former seems to be a better definition
as compared to the latter.
ii. It is that portion of a firm’s current assets which is financed by long-term funds.
3. Permanent Working Capital: This refers to that minimum amount of investment in all current
assets which is required at all times to carry out minimum level of business activities. In otherwords, it represents the current assets required on a continuing basis over the entire year. Tandon
Committee has referred to this type of working capital as “Core current assets”.
I Current Assets: Amount Amount Amount
Minimum Cash Balance ****
Inventories :
Raw Materials ****
Work-in-progress ****
Finished Goods **** ****
Receivables :
Debtors ****
Bills **** ****
Gross Working Capital (CA) **** ****
II Current Liabilities :
Creditors for Purchases ****
Creditors for Wages ****
Creditors for Overheads **** ****
Total Current Liabilities (CL) **** ****
Excess of CA over CL ****
+ Safety Margin ****
Net Working Capital ****
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