What is working capital explain the constituents of working capital?

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

Net Working Capital = Current Assets − Current Liabilities

Net Operating Working Capital = Current Assets − Non Interest-bearing Current Liabilities

Equity Working Capital = Current Assets − Current Liabilities − Long-term Debt

A company can be endowed with assets and profitability but short of liquidityif its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

COMPONENTS OF WORKING CAPITAL

CURRENT ASSETS (LOANS AND ADVANCES) SHORT TERM ASSETS

These are those real assets which are intended to be disposed off and get it converted into money / money's worth within a period of 12 months.

Examples:

® Closing Stock (RM, WIP, Finished Goods)

® Sundry Debtors

® Bills Receivable

® Cash in Hand and Bank

® Pre-paid Expenses

® Loans Given

® Advance to Suppliers, etc.

CURRENT LIABILITIES (AND PROVISIONS) SHORT TERM LIABILITIES

These are those outsiders liabilities which are payable within a period of 12 months.

Examples:

® Sundry Creditors

® Bills Payable

® O/S Expenses

® Advance from Customers

® Tax Payable

® Bank Overdraft, etc.

Working Capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition of working capital keeps on changing continuously, in the course of business.

FORMAT - STATEMENT OF ESTIMATION OF WORKING CAPITAL

Particulars

W.N.

Rs.

Rs.

a) Current Assets, (Loans & Advances)

XXX

b) Current Liabilities (& Provisions)

XXX

Working Capital ( a-b)

XXX

(+) Safety Margin

XXX

Estimated Working Capital

XXX