Concept of Working Capital

Concept of Working Capital:

The concept of working capital comprises meaning of working capital and its nature. Working capital is investment in the current assets. Devoid of this investment, we can’t operate our fixed assets correctly. For getting good gains from fixed assets, we require buying some current assets or paying some expenditures or invest our money in current assets. For illustration, we keep some of cash that is one of the main parts of working capital. At any time, our machines might require repair. Repair is revenue expenditure however without cash, we can’t repair our machines and with no machines, our production might delay. Similar to this, we require inventory or to invest in debtors and other short term securities.

On the base of Concept, we can classify our working capital into two parts:

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1. Gross Working Capital:

In this working capital, we study gross working capital. We do not remove current liabilities in this concept however we employ current liabilities as source of fund. Assume that if we buy goods on credit, it means saving our cash and we can utilize this as working capital for paying other expenditures.

2. Net Working Capital:

Under this, we employ net working capital. For this, we first remove all our current liabilities from our current assets. Surplus of current assets over current liabilities will be current assets. We have to keep minimum level of working capital in our business for operation of business actions. This concept is too used for the preparation of balance sheet. In vertical form of balance sheet, we illustrate excess of current assets over current liabilities.

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