Forms of Short-term Financing/Working Capital
Working Capital edit
Working capital is defined as the excess of current assets over current liabilities. Current assets are the most liquid and most easily convertible to cash of all assets. Current liabilities are obligations due within one year; therefore, working capital measures what is available to pay a company's current debts. It also represents the cushion or margin of protection a company can give their short-term creditors. Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm's ability to meet its trade and short-term debt obligations as well as to remain financially viable.
To understand Current Assets and Current liabilities: Current Asset are those assets that in a ordinary course of business can be or will be turned into cash within a breif period without undergoing dimunition of value and without disrupting the organisation. Few examples of current assets Cash in hand or in bank, Bills receivable from customers, promissory notes, inventories, work in progress, finished goods, Marketable securities hels as temporary investments, prepaid expenses, Accrued income.
Current Liabilities are those liabilities intended as their iception to be paid in ordinary business course within a reasonable short time out of the current assets or by creating another current liability or the income of the business. Few Examples of Current liabilities are Accrues expenses, Salary, Bonds tobe paid in one year, interests, Dividends declared and payable.
Working Capital = Current Assets - Current Liabilities