Concepts and Definitions of Working Capital

There are two concepts of working capital: gross and net.

The term gross working capital, also referred to as working capital, means the total current assets.

The term net working capital can be defined in two ways: (i) the most common definition of net working capital (NWC) is the difference between current assets and current liabilities: and (ii) alternate definition of NWC is that portion of current assets which is financed with long term funds.

The task of the financial manager in managing working capital efficiently is to ensure sufficient liquidity to the operations of the enterprise. The liquidity of a business firm is measured by ability to satisfy short term obligations as they become due. The three basic measures of overall liquidity are (i) the current ratio, (ii) the acid test ratio, and (iii) the net working capital. The habitability of the first two measures has already been discussed. In brief, they are very useful in inter firm comparisons of liquidity. Net working capital (NWC), as a me of very useful for comparing the performance of different firms, but it is useful for internal control. The NWC helps in comparing the liquidity of the same firm over time. For purpose of working capital management, NWC can be said to measure the liquidity the firm. The other words, the goal of foreseeing capital management is to manage the current and liabilities in such a way that an acceptable is maintained.

Share This