Net Working Capital Essay

In a narrow since, the term working capital refers to the net working capital. Net working capital is the excess of current possessions of current assets over current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS –CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business.

CKONSTITUENTS OF CURRENT ASSETS

 Cash in hand and cash at bank

 Bills receivables

1Sundry debtors

 Short term loans and advances

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concepts are sometimes preferred to the concept of working capital for the following reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management fish more interested in total current assets with which it has to operate then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital.

4. This concept is also useful in deterring the rate of return on investments in working capital. The net working capital concept, however, is lap important for following reasons:

It is qualitative concept which indicates the firm’s ability to meet to its operating expenses and short term liabilities.

It indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing apart of working capital requirement out of the permanent sources of

Every firm has to maintain a minimum level of raw mate4rial, work-in-process, finished well and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of working is permanent or fixed working capital as this part of is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

TEMPORARY O R VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capitalism that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the