Working capital is the money you need to cover business expenses, meet short-term obligations, and to grow your business.
Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes.
Working capital is the amount of money that a company has tied up in funding its day to day operations.
A company has to tie up money to fund its stocks, credit sales and other current assets, but this is offset by its ability to fund this from current liabilities such as purchases on credit. If a company buys on credit it does not have to tie up (as much) money in its stocks. In some businesses (such as grocery retail) working capital can even be negative. A business that buys on credit and sells for cash is being partly funded by its suppliers.
Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc…
Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. It is otherwise known as revolving or circulating capital it is nothing but the difference between current assets and current liabilities.
Working Capital = Current Asset – Current Liability.
Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it.
Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business.
A lack of working capital makes it hard to attract investors or to get business loans or obtain credit.
Where does working Capital come from
• From an accounting standpoint, working capital comes from:
• Net income;
• Long-term loans (non-current liabilities);
• Sale of capital (non-current) assets; and
• Funds contributed by the owners and investors (stockholders).