Concepts of working capital:

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Working capital :

On the managerial point of view capital can be divided into two categories.a)fixed capital b)working capital.Our subject matter is working capital.
Working capital maybe regarded as the life blood of a business.It is defined as all the short term assets used in daily operations of the firm.It is the mirror of solvency of a firm that helps to measure the degree of the protection.
Cash in hand,cash at bank,B/R ,stock,debtors etc. are the vivid examples of short term assets or as the trading capital and circulating capital.

Mainly there are two concepts of working capital:

1.Balance sheet: This concept is also known as traditional concept that can be classified into four categories.
a.Gross profit : Actually working capital is commonly called as gross working capital.It refers to the firm's investment in current assets.Current assets are those assets which are normally converted into cash within one year.
b.Net concept : The difference between the firm's current assets and it's current liabilities is called networking capital.Current liabilities are those claims of outsides which are expected to mature for payment within one year and include creditors ,bill payable,bank overdraft,outstanding expenses,long term loan which has paid in the current year etc.
c.Fixed concept of working capital : Permanent working capital is the minimum amount of current assets which is needed to conduct a business even during the dullest season of the year.The minimum level of current assets is called fixed working capital.
2.Operating cycle concept: It is the time duration required to convert sales,after the conversion of resources into inventories,into cash.This cycle is repeated again and again.

Characteristics of working capital :

1.The term of working capital is short.Generally it anticipates for one or below one year.
2.Working capital is near to cash type.It refers to that type of investment which can be converted into cash with an accounting year.
3.Working capital is a continuous process.It is always circulating.Such as cash-raw materials-product-sales-converted into cash.So, it is repeated again and again.
4.It is always influenced by the sales .It is changing with the changing of the volume of sales.

5.More working capital means more liquidity but less profitability.

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