What is Working Capital
A working capital is another component of the capital that the business needs to meet its day-to-day requirements. Payments to creditor, salaries to workers, raw material purchases, etc., are generally recurring in nature. They can be easily converted to cash. Hence, short-term capital is also known as working capital. A key aspect of financial management is the management of working capital. Short-term finance is primarily concerned with the liquidity and profitability of the business concern. Working capital management helps business concerns improve their operating performance, as well as meet their short-term liquidity needs.
Therefore, it is not only a part of financial management but also the overall management of a business concern to study working capital management. According to the definition, working capital refers to the capital that is not fixed but it is usually defined as the difference between current assets and current liabilities.
The concept of gross working capital determines the concept of working capital. A business concern’s gross working capital is the amount invested in its total current assets. The total current assets of the business concern is known as the gross working capital.
Gross Working Capital (GWC) = Current Assets
Net working capital is defined as the concept that considers both current assets and current liabilities. A concern’s net working capital is its excess of current assets over current liabilities over a given period of time. Positive working capital is when the current assets exceed current liabilities; negative working capital is when the opposite is true.
Net Working Capital Formula,
Net Working Capital (NWC) = Current Assets(CA) – Current Liabilities (CL )