What is Working Capital – Meaning, Definition and Main Components

Gaurav Seth
20 Likes | 555 days ago



isVerifiedExpertAuthor is a Zfunds Verified Expert
Gaurav Seth

What is Working Capital

Working capital, also known as net working capital (NWC), is the difference between a company's current assets and current liabilities, such as cash, accounts receivable/unpaid customer invoices, and inventories of raw materials and finished products. Like accounts payable and debt. NWC is an indicator of any company's liquidity, operational efficiency, and also of short-term financial position.

If a company has a significant positive NWC, it should have the potential to invest and grow. If a company's current assets do not exceed short-term debt, it can be difficult for creditors to grow and repay. It can even go bankrupt. Understanding Working Capital NWC estimates are derived from the many assets and liabilities on the company's balance sheet.

Current Assets Listed

include cash, accounts receivable, inventories, and other assets that are expected to be liquidated or converted to cash within a year. Short-term debt includes accounts payable, wages, taxes, and the short-term portion of long-term debt payable within a year.

4 Reasons Your Business May Need Additional Working Capital

 • Seasonal differences in cash flow are to prepare for the busy season or to keep your business running when less money comes in. Typical for many businesses that may require additional capital.

• Almost every company has a period when it needs additional working capital to meet its obligations to its suppliers, employees, and government while waiting for payments from its customers.

• Additional working capital can improve your business in other ways. For For example, take advantage of supplier discounts or buy in bulk.

• Working capital can also be used to pay temporary workers and other project-related costs.

Main Components of Working Capital

Trade Receivables:

These are the quantity wherein the enterprise is owned via way of means of its customers. Each enterprise has a selected exchange cycle, and groups have to make certain to hold their exchange receivable cycle in keeping with the enterprise. An extra prolonged exchange receivable duration will bring about a not-on-time series of cashflows, impacting the cash conversion cycle of the enterprise.


Inventory is some other vast part of present-day belongings and paperwork a quintessential thing of operating capital management. Good Inventory Management is vital given that it's miles accountable for correct management over stock proper from the uncooked cloth degree to the degree of the completed item.

Inventory Management starts off evolved with stock management and entails the well-timed purchase, right storage, and green usage to keep even and orderly go with the a drift of completed items to satisfy well-timed dedication via way of means of the enterprise and on the identical time keep away from extra operating capital in preserving of stock as to bring about a postpone in coins conversion cycle and additionally growth the chance of obsolescence and growth operating capital requirement which adversely influences the profitability of the enterprise

Cash and Bank Balances:

Cash is the king and an integral part of liquid assets. Cash includes not only cash but all liquid securities that can be easily converted to cash. Proper cash management is a great help in maintaining a good working capital cycle and also allows the company to manage the working cycle. In addition, the efficiency of a business is determined by the amount of free cash flow (FCFF)

it generates for the business. In addition, with proper use of cash, businesses can receive trade discounts and improve their cash conversion cycle. This is an important benchmark for analyzing a company's working capital cycle.

Accounts payable:

Accounts payable make up the majority of current liabilities. It also includes the amount billed. This is the amount you have to pay for a loan purchase made by the company. Well-thought-out accounts payable management helps ensure on-time payments and heartfelt business relationships with suppliers and creditors.


Get Investment Advice from India's Top Experts