Types of working capital

Types of working capital ppt

What are the types of working capital? Net Working Capital: It implies the surplus of current assets over current liabilities. Thus working capital is considered the life-blood of the business. However, while preparing a vertical form of balance sheet, the Institute of Chartered Accountants of India has defined and shown working capital as the difference between current assets and current liabilities. Permanent working capital implies the base investment amount in all types of current resources which is respected at all times to carry on business activities. Current liabilities means your obligation to pay within a one year within the standard course of business or perhaps payable out from the current assets within short time period of time or even payable out of the revenue income of this business. For example the firm is required to maintain the minimum level of raw material, finished goods or cash balance etc. They are explained as follows.

Smooth Flow of Production: To maintain a smooth flow of production, it is necessary that adequate working capital is available for paying trade suppliers, hiring labour and incurring other operating expenses.

Unforeseen contingencies like business depression, financial crisis due to huge losses etc.

Types of working capital

For example advertising the product of the firm requires special working capital. A firm is always working with the expectation of some risks which may be controllable or uncontrollable. It is useful for the following purposes: a It is the total investment in current assets which earns profit.

types of working capital pdf

Components or Composition of Working Capital: There are two components of working capital viz. For example the firm is required to maintain the minimum level of raw material, finished goods or cash balance etc.

Working capital management outlines a major part of the daily activities of an Entrepreneur. Regular Payment of Wages and Salaries: The firm can make regular and timely payment of wages and salaries to its employees.

This activity is very important and requires attention because working capital maintains the daily business operations smooth.

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Working Capital Management: Components & Approaches