What is Working Capital

Working capital is something that we deal in our every day business activity. This is a term, which is of use very often in the business world. Working capital may be defined as ‘the financial measurement that represents the liquid funds available to a business’.

The use of working capital is very essential in a business as it is very important carrying out the daily activities of the business. Working capital consists of the entire all the raw materials, the daily expenses like fuel, food and refreshments and other payments received by the company.

The working capital of the business is the current assets and the current liabilities of the company. It is also known as liquid capital as the position of the company’s liquidity can be known with the use of the working capital. For example, if the current assets are more than the current liabilities, then the liquidity position of the company is known to be good. On the other hand, if the current liabilities are more than the current assets, then the liquidity of the company is not good.

The above-mentioned phenomenon is also known as a working capital deficiency. It is very important for the business to come out of this situation as the deficiency indicates that the business is running under a loss. This picture should not be portrayed to the public, as it will lose trust in the firm.

The business should take immediate measures to get out of this situation and one solution is to take a merchant loan. This is the only possible way as it infuses money into the working of the business and then repayment of the loan. It is not easy to get a business loan, as the banks will look in to the liquidity position of the business to grant this loan.

Another method, which can be used to bring a good liquidity position to the business, is by using the method of putting back profits. This means that the profit gained by the business will be used in the advancement and expansion of the same. this can be used for businesses of any size and type.

Working capital is used to calculate three ratios to analyze the position of the business firm. The first is the current ratio in which the business measures the assets to the liabilities. The second is the liquid ratio under which the liquidity is measured. The last is the absolute quick ratio. These ratios are very useful in analyzing the activities of the business and making immediate changes to benefit the firm in a positive way.