Concept of Working Capital:
Capital required for a business enterprise can be classified under two main categories i.e.
a) Fixed Capital and
b) Working Capital
Every business enterprises require long-term funds to create productions facilities through the purchase of Fixed Assets i.e.., Land, Buildings, Machinery, Furniture, etc. Investment in these assets indicates the Fixed Capital, or capital that is permanently or consistently blocked by the company. On the other hand, funds are required for short-term purposes i.e., to carry out day-to-day activities i.e. purchase of raw materials and components, payment of wages, and other recurring expenses known as “WORKING CAPITAL“.
In general, Working Capital refers to that part of business capital, which is required to procure short-term or current assets such as cash, marketable securities, debtors, and inventories. Thus, money invested in existing assets continues to circulate quickly and is continually turned into cash.
Therefore, working capital is often referred to as circulating, revolving, or short-term capital.
Various authors define Working Capital in different ways, but the subject matters are the same. “Working capital is the number of funds required to cover the operating cost of the business,” according to SHUBIN. Circulating capital, in the words of GENESTENBERG, refers to current assets of business companies that transitioned from Cash to Raw Materials/Inventories, Inventories to Finished Goods, Finished Goods to Debtors, and Debtors to Cash in the ordinary course of business.