What is working capital?

2 min read

Working capital indicates the liquidity levels of businesses for managing day-to-day expenses and covers inventory, cash, accounts payable, accounts receivable and short-term debt. It is an indicator of the short-term financial position of an organisation and is also a measure of its overall efficiency.

Working capital = current assets - current liabilities

This calculation indicates whether the company possesses sufficient assets to cover its short-term financial needs.

Sources of working capital

The sources for working capital can be long-term, short-term or spontaneous. Long-term working capital sources include long-term loans, provision for depreciation, retained profits, debentures and share capital. Short-term working capital sources include dividend or tax provisions, cash credit, public deposits and others. Spontaneous working capital is derived from trade credit, including notes payable and bills payable.

Types of working capital

There are several types of working capital based on the balance sheet or operating cycle view. A balance sheet view classifies working capital into net (current liabilities subtracted from current assets featuring in the balance sheet) and gross working capital (current assets in the balance sheet). The operating cycle view classifies working capital into temporary (difference between net working capital and permanent working capital) and permanent (fixed assets) working capital.

Working capital cycle

Working capital cycle refers to the time taken to convert net current liabilities and assets into cash by a business. The shorter the working capital cycle, the swifter the company will free up its blocked cash. Businesses strive to lower this working capital cycle to enhance liquidity in the short term. Bajaj Finserv offers working capital loans to address any deficits in working capital and ensure optimal operations.

Additional Read: Importance of capital budgeting

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