Meaning
A measure of both a company's efficiency and its short-term financial health. The working capital is calculated as:
Working Capital = Current Assets – Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing
1) Gross Working Capital :
Gross Working Capital means the total Current Assets without deducting the Current Liabilities.
Gross Working Capital = Current Assets
2) Net Working capital:
A part of Gross working Capital is financed Current Liabilities such as Creditors for goods, Bills Payables and creditors for expenses.
Net Working Capital = Current Assets
– Current
Liabilities
It is also known as Current Assets.
Distinction between Gross Working Capital and
Net Working Capital
Gross Working Capital Net Working Capital
Gross working capital is the total of
all current assets of a business.
Net working capital is current
assets minus current liabilities.
Current assets include cash, and any assets a business could quickly convert to cash such as equipment, land or buildings.
Current liabilities are short-term debts owed by a company, such as accounts payable, taxes and dividends payable.
This also includes assets that will convert to cash within a year, such as accounts receivable.
Current liabilities either are
Permanent Working Capital
It is the minimum working capital required for producing predetermined production
Permanent working is the minimum investment kept in the form of inventory of raw materials, work in process, finished goods, stores &
• Though this investment is stable in the short run, it certainly varies in the long run depending upon the expansion programmers
undertaken by a firm. It may increase or decrease over a period of time.
Temporary Working Capital
• It is the additional current assets required for temporary period, and it is above permanent WC
• A firm is required to maintain an additional current asset temporarily over and above the permanent working capital to satisfy cyclical
demands. Any additional working capital apart from permanent
working capital required to support the changing production and
• In Other words, an amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. • At times, additional working capital is required to meet the
Cash Working Capital
The actual Cash realized from all Current Assets appearing in the Balance Sheet may be less than the book value because
(a) Debtor include Profit Margins
(b) Depreciation ( a non-cash charge)
may have been included as an overhead in valuation of closing stock of finished goods.
The concept of Cash working Capital makes proper adjustments in
Positive Working Capital
When Current Assets exceeds Current Liabilities the Net Current Asset is a Positive figure and hence it is called Positive Working Capital.
Negative Working Capital
When Current Assets are less than Current Liabilities the Net
Current Assets is negative figure and hence is called Negative Working Capital.
Factors affecting Working Capital
3. Operating Cycle of a Service Concern
Cash
Sale on Credit Purchase of Raw materials Start Production Receipt from Debtors Finished Goods Produced CASH
March 1 March 4 March 6 March 12 March 18
RM in Stock WIP in Stock FG in Stock Debtors
Inventory Cycle Credit Cycle 3 Days 2 Days 6 Days 7 Days
Statement of Estimating Working Capital
Particulars Calculation Amount
I. CURRENT ASSETS
1. Closing Stock
a) Raw Material (RM) R.M.Cost x Credit Period 12/52/365
b) Work-in-Progress
i. Material R.M.Cost x Credit Period
12/52/365
ii. Labour Wage Cost x Credit Period
12/52/365
iii. Overheads Overhead Cost x Credit Period
12/52/365
c) Finished Goods (FG) Total Cost x Credit Period 12/52/365
Particulars Calculation Amount 2. Debtors Sales Cost x Credit Period
12/52/365
3. Pre-paid Expenses Expenses x Credit Period 12/52/365
4. Cash and Bank Balance Amount Given
TOTAL CURRENT ASSETS
II. CURRENT LIABILITIES
1. Creditors R.M.Cost x Credit Period
12/52/365
2. Outstanding Expenses Expenses x Credit Period
12/52/365
3. Advance From Customers Amount Given
TOTAL CURRENT LIABILITIES
Particulars Calculation Amount Net Working Capital (I – II)
