Ineffective Utilization of Working Caital
Ineffective Utilization of Working Capital
Meaning of Working Capital
Business organization requires adequate capital to establish business and operate their activities. The total capital of a business can be classified as fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital.
Capital required for a business can be classified under two main categories via 1. Fixed Capital 2. Working Capital
Every business needs funds for two purposes * For its establishment * To carry out its day- to-day operations
Long terms funds are required to create production facilities through purchase of fixed assets such as P&M, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is called Fixed Capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of ages and other day–to-day expenses etc. These funds are known as Working Capital.
In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.
Classification of Working Capital Working capital may be classified in two ways:
On the basis of concept.
On the basis of time.
There are two concepts of working capital * Gross working capital * Net working capital
Gross Working Capital
The gross working capital is
Meaning of Working Capital
Business organization requires adequate capital to establish business and operate their activities. The total capital of a business can be classified as fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital.
Capital required for a business can be classified under two main categories via 1. Fixed Capital 2. Working Capital
Every business needs funds for two purposes * For its establishment * To carry out its day- to-day operations
Long terms funds are required to create production facilities through purchase of fixed assets such as P&M, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is called Fixed Capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of ages and other day–to-day expenses etc. These funds are known as Working Capital.
In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.
Classification of Working Capital Working capital may be classified in two ways:
On the basis of concept.
On the basis of time.
There are two concepts of working capital * Gross working capital * Net working capital
Gross Working Capital
The gross working capital is