2. Working capital is the amount
of funds necessary to cover the cost of
operating the enterprise.
3. CLASSIFICATION OF WORKING
CAPITAL
On the basis of concept
1. Gross working capital
2. Net working capital
On the basis of time
1. Permanent or fixed working capital
2. Temporary working capital
4. On the basis of concept
Gross working capital :
In the broad sense
the term working capital refers to the gross
working capital and represents the amount
of funds invested in current assets. Thus
the gross working capital is the capital
invested in current assets of the
enterprise.
5. Net working capital :
In narrow sense the term
working capital refers to the net working capital
is the excess of current assets over current
liabilities it may be positive or negative.
Net working capital=
Current assets - Current liabilities
6. On the basis of time
Permanent or fixed working capital:
There is always a minimum level of
current asset which is continuously required by
the enterprise to carry out its normal business
operations, This minimum level of current
assets is called permanent or fixed working
capital. It may be regular or reserved.
7. Temporary or Variable Working
capital:
It is the amount of working capital which
is required to meet the seasonal demands and
some special exigencies.
The capital required to meet the seasonal needs
of the enterprise is called seasonal working
capital.
The capital required to meet the special
exigencies is called special working capital .
8. Disadvantages of
Excessive working capital
Excessive working capital means idle funds
so business cannot earn a proper rate of
return on its investment.
Lead to unnecessary purchasing and
accumulation of inventories causing more
chances of theft, waste and losses.
It implies excessive debtors and defective
credit policy which will cause increase in bad
debts.
It may result in to overall inefficiency in the
organization.
9. Value of shares may fall due to low rate of
return on investment.
Disadvantages or dangers of
inadequate Working capital
Firm cannot pay its short term liabilities in time
and which will affect its reputation
It cannot buy its requirements in bulk and
cannot avail for discounts etc:
Difficult to exploit favorable market conditions
and undertake profitable projects.
10. Firm cannot pay day to day expenses of it’s
operations and it creates inefficiencies, creates
cost and reduces the profit of the business.
It becomes impossible to utilise efficiently the
fixed assets due to non availability of liquid
funds.
