• Introduction • Concept of Working Capital • Importance of Working Capital • Requirement of Working Capital • Working Capital Analysis of GSRTC
Working Capital Analysis 5.1 INTRODUCTION
In financial management, two important decisions are very vital and crucial. They are decision regarding fixed assets/fixed capital and decision regarding working capital/current assets. Both are important and a firm always analyzes their effect to final impact upon profitability and risk.
Fixed capital refers to the funds invested in such fixed or permanent assets as land, building, and machinery etc. Whereas working capital refers to the funds locked up in materials, work in progress, finished goods, receivables, and cash etc.
Thus, in very simple words, working capital may be defined as “capital invested in current assets.” Here current assets are those assets, which can be converted into cash within a short period of time and the cash received is again invested into these assets. Thus, it is constantly receiving or circulating. Hence, working capital is also known as circulating capital or floating capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital. These are:
1. Gross working capital: (Total Current Assets) The gross working capital, simply called as working capital refers to the firm’s investment in current assets. Current assets are the assets, which can be converted into cash within an accounting year or operating cycle. Thus, Gross working capital, is the total of all current assets. It includes 1. Inventories (Raw materials and Components, Work-in-Progress, Finished Goods, Others) 2. Trade Debtors 3. Loans and Advance 4. Cash and Bank Balances 5. Bills Receivables. 6. Short-term Investment
Working Capital Analysis 2. Net Working Capital: (Total Current Assets – Total Current Liabilities) Net working capital refers to the difference between current assets and current liabilities. Current...