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What is Working Capital?
Working capital means the funds essential to be devoted in the business for a short period usually up to one year. Working capital can be also said short-time capital or circulating capital.
Why working capital is called by the name circulating or revolving capital?
Because of the continuous process of investing and realizing working capital is called circulating and sometimes revolving capital. Funds which are invested in current assets are continuously recovered through realization of cash and it is again reinvested in current assets. It is a process of cash to current asset and back to cash and so on.
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Why working capital is needed?
Working capital is essential to meet day to day operating expenses and for holding stocks of raw-materials, consumables, work in progress, spare parts, finished goods and debtors balances also bills receivable. Working capital is needed-
- To hold the stock of raw materials for a period so that it contributes to the production process uninterruptedly.
- To hold the stock of work-in-progress during the time raw materials get converted into finished goods.
- To hold the stock of finished goods for a period so that the demands of customers can be meet on a continuous basis.
- To grant credit to its customers for competitive reasons.
- To hold cash balances to meet expenses like administration, selling and distribution etc.
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Difference between Permanent and Temporary Working Capital-
- Permanent working capital refers to a level of current assets which is to be maintained and vital for the firm to carry its business regardless of the operation levels. While Temporary working capital refers to the working capital which is over and above the permanent working capital. It is required to meet seasonal needs and temporary requirements.
- Permanent working capital is also known as fixed or hardcore working capital. Temporary working capital is also known as fluctuating or variable or seasonal working capital.
- Permanent capital does not depend upon any factors while temporary working capital depends upon several factors as it is keep on fluctuating from period to period.
- Permanent working capital is stable while temporary working capital is fluctuating i.e., sometimes increasing and sometimes decreasing.
There are more such differences between these working capitals. We have the best team of experts who are experienced in writing for years. We also clear explanation to this by using diagrams and figures like the levels of working capital in case of a stable firm and in case of a growing firm.
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- Operating cycle
- Components of operating cycle
- Gross working capital and net working capital
- Working capital management
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