Working Capital
Working capital can be called short-term finance. It is the amount normally available to any business so that they can finance day-to-day business operations and current activities. The primary objective of working capital is to enable an enterprise to maintain cash flows to meet its day-to-day financial obligations. Working capital has two different meanings from the perspective of value.
First is the gross working capital, and here, the enterprise’s working capital is represented by the total investment in current assets. Secondly, net working capital, and here, an enterprise’s working capital is denoted by the difference between current asset holdings and current liability holdings.
Business stakeholders consider positive working capital as an important indicator to judge a company’s financial well-being. For any company to stay in the market, they need to remain solvent in the long run. Even accounting ratios are calculated based on a mix of working capital, current assets, and current liabilities.
What is Working Capital? – Formula, Components, Limitations
Working Capital represents the firm’s holdings of assets like cash, marketable securities, receivables, etc. Funds, being the backbone of any efficient business, are the most important aspect to be managed. Careful maintenance of the working capital and fund mix to acquire are key areas of decision-making and are important as they help to meet any business contingencies.
From an accounting perspective working capital is the difference between the short-term sources of funds, i.e., the current assets, and the short-term financial obligations, i.e., the current liabilities. In this article, we are providing you with all the information regarding working capital and its formula, components, and limitations.
What is Working Capital?
Table of Content
- Working Capital
- Components of Working Capital
- Formula for Working Capital
- Significance of Working Capital
- Advantages of Working Capital
- Limitations of Working Capital
- FAQs on Working Capital