What is Working Capital?

What is Working Capital?

Working Capital refers to Networking capital which considers both current assets and current liabilities. Net Working capital is the excess of currents assets over the current liabilities of the business.

If currents assets exceed current liabilities, it is considered as “Positive Working Capital.” Positive working capital indicates the company is able to maintain its current activities including loan repayments.

If Current liabilities exceed current assets, it is Negative Working Capital. Negative working capital indicates that the company is not able to pay emergency payments.

Formula, NWC = CA – CL

Where,

NWC = Net Working Capital

CA = Current Assets

CL = Current Liabilities.

Currents Assets (CA) may include the following items:

  • Cash in hand
  • Cash at Bank
  • Sundry debtor
  • Bills receivables
  • Sundry Advances
  • Accrued Income
  • Inventories
  • Prepaid expenses etc.

Current Liabilities (CL) may include the following items:

  • Accounts Payable
  • Bills Payable
  • Accrued Expenses
  • Short term loan or advances
  • Dividend Payable
  • Bank Overdraft
  • Provision for Taxation