According to P.V. Kulkarni “Working Capital is defined as the excess of current
assets over current liabilities and provisions. It is not current assets or not
According to Board of American Institute of Certified Accountants, “Working
Capital some times called net working capital, is represented by the excess of
current assets over current liabilities and identified as the relatively liquid
position of the total enterprise capital which constitutes a margin or buffer
for maturing obligations with in the ordinary operation cycle of the business."
According to Corine T. Morgand, “Working Capital is defined as the difference
between company’s current assets and current liabilities the accounts, which
belong to this group are usually the most active in the company. Unlike fixed
assets they reflect the company’s daily activities."
According to Estern and Bringham, “Working capital refers to a firm’s investment
in short term assets such as cash, short term securities accounts receivable and
inventory. Working capital is defined as current assets minus current
liabilities. If the term working capital is used without further qualification,
it generally refers to gross working capital."
Working capital is essentially circulating working capital. Working capital
moves from one process to another, from cash to inventories and back to cash.
The term circulating working capital is used to designate those assets that are
changed with relative rapidity from one from to another i.e. from cash to
inventories to receivable to cash.
In the case of manufacturing concern, working capital is required to cater the
following needs of business in order.
The above operating cycles is repeated again and again over the period depending
upon the nature of the business and type of product etc.
The summarize it may be emphasized that gross and net concept of working capital are two important facts of the working capital management. There are no precise
way to determine the exact amount of gross and net working capital for every
firm. The data and problems of each company should be analyzed to determine the
account of working capital. There is no specific way realizable in practice to
finance current assets by short sources only.
Keeping in view the constraints of individual company, a judicious mix of long term and short term finance should be invested in current assets.
1. Gross Working Capital :
This concepts refers to the total of current assets.
Current assets are those assets which are convertible into cash with in the
ordinary course of business. It is also known as Circulating capital and current
capital. Current assets includes :
Net Working Capital :
- Cash in Hand.
- Cash at Bank
- Sundry Debtors
- Short term loan and advances
- Inventory of stock as : Raw material, work in progress, Finished goods.
- Temporary investment of surplus funds.
- Prepaid expenses.
This concepts defined the most common definition of net
working capital. In this concepts working capital is the difference between
current assets and current liabilities, which are expected to be paid in the
ordinary course of business with in a year.
Current Liabilities includes :
- Bills payable
- Sundry creditors
- Outstanding Expenses
- Dividend Payable
- Bank Overdraft
- Provision for Taxation.
Net Working Capital may be positive or negative. Net working capital will be
positive when current assets are more than the current liabilities. If current
liabilities are more than current assets then net working capital will be
Working Capital Management - Circulating system :
funds in the business are obtained from the issue of shares, issue of
debentures. Other long term arrangement and from operations of business. A high
part of generated funds is used to acquire fixed assets viz. plant and
machinery, land and building and some other fixed assets, while the remaining
part of the generate funds is used for day to day operations for the business
i.e. to pay wages, creditors for raw material purchases and overhead expenses,
for the raw material processed. This makes possible the stocking of finished
goods by whose sales either account receivable are created or cash is received.
In this process profit are generated. A part of profit is used to pay tax.
Interest and dividends while the remaining part is ploughed back in the
business. This cycle goes on constantly throughout the life of business.