Business organization require adequate capital to establish business and operate their activities. The total capital of a business can be classified as fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital.Similarly, the capital, which is needed for investing in current assets, is called working capital.
The capital which is needed for the regular operation of business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital. Working capital is used for regular business activities like for the purchase of raw materials, for the payment of wages, payment of rent and of other expenses. Working capital is kept in the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Concept Of Working Capital
Generally, there are two concepts of working capital i.e. gross concept and net concept.
1.Gross Concept Of Working Capital
According to gross concept, working capital refers to all the current assets and represents the amount of funds invested in current assets. Thus, gross working capital is the capital invested in current assets. Current assets are those assets which can be converted into cash within the short-time period.
Gross Working Capital = Total current assets
In this way, gross working capital refers to the firm's investment in current assets. Gross working capital represents total of current assets which includes cash in hand, cash at bank, inventory, prepaid expenses, bills receivable etc.
2.Net Concept Of Working Capital
According to the net concept, working capital is the excess of current assets over current liabilities. In other words, the difference between current assets and current liabilities is called net working capital.
Net Working Capital = Current Assets - Current liabilities
In this way, net working capital is the difference of current assets and current liabilities.