There are several types of working capital based on the balance sheet or operating cycle view. The balance sheet view classifies working capital into net (current liabilities subtracted from current assets featuring in the company’s balance sheet) and gross working capital (current assets in the balance sheet).
Gross working capital is the total value of a company's current assets. It includes cash, accounts receivable, inventory, short-term investments and marketable securities. Gross working capital does not indicate the company's actual financial health as it does not include the current liabilities. The company's actual financial health can be estimated by calculating the difference between current assets and current liabilities. This difference is the actual working capital that the company has to meet its obligations.
Net working capital is the difference between gross working capital (current assets of a company) and current liabilities. A positive working capital indicates that assets are more than the liabilities which signifies that the company is in a better position to meet its current obligations. However, negative working capital signifies liabilities exceeding assets, which indicates that the company is facing financial distress.
Here, the key difference between gross working capital and net working capital is that gross working capital is always quantitative and will always be a positive value while net working capital is qualitative and could either be negative or positive in value.
On the other hand, operating cycle view classifies working capital into temporary (difference between net working capital & permanent working capital) and permanent (fixed assets) working capital. Temporary working capital can be further broken down into reserve and regular working capital as well. These are the types of working capital depending on the view that is chosen.
The Working Capital Cycle or WCC means the time period that is taken to convert net current liabilities and assets into cash by any organization. This is an indicator of the organizational efficiency in terms of effectively managing liquidity position in the short-term and the cycle, which is calculated in days, is basically the time period between the generation of revenue through cash by selling products and the buying of materials for producing these products.
The shorter this working capital cycle, the swifter will the company be able to free up its cash, which is blocked. In case the cycle is long, the capital usually gets stuck without earning returns in the operational cycle. Businesses always strive to lower this working capital cycle with a view towards enhancing liquidity in the short-term.
MSME stands for Micro, Small and Medium Enterprise. It was introduced by the Government of India in agreement with the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. As per this act, MSMEs are the enterprises involved in the production, processing or preservation of goods and commodities. Vital for economic growth, this sector contributes around one-third of the country’s GDP and generates employment for around 110 million of the population.
It also plays an important role in the socio-economic development of the country as many of these enterprises operate in rural India. According to the Government's annual report of 2018-2019, more than 6 lakh MSMEs operate in the country.
Initially, MSMEs were classified based on two factors - investment in plant/machinery and an annual turnover of the enterprises. However, the Ministry of Micro, Small and Medium Enterprises has recently revised the classification by combining these two factors into a single criterion.
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