Meaning Of Working Capital Or Circulating Capital

Working Capital is the amount of money which is used for the daily running of the business. It is the capital required for the day-to-day running of the business.

It is also the capital available to a business for general purposes after current liabilities have been cleared. Current liabilities are the liabilities which are to be settled with one year i.e they last for a short period of time. e.g: creditors, overdraft, income in advance, etc.

In accounting, working or circulating capital means the excess of current assets of a business over it's current liabilities. It includes money for paying wages, salaries and payment of raw materials used for the manufacturing of products, etc.

Working Capital = Current assets - Current Liabilities.

Working capital is very important in a business organization, as a result of this, we compiled a list of the Importance of the working capital of a business:

1. Working capital is used to check against tying down too much money for current assets.

2. It helps to determine whether the business is solvent or not. A solvent business is a business that has the ability to settle debt without selling its fixed assets. Fixed assets are the assets that can last for a long period of time. e.g Land and Building, plant and machinery, motor van, fixtures and fittings, etc

3. Working capital also helps to determine the amount of money that will be available for the running of the day-to-day activities of the business. Some of the things needed to run the activities of the business are: repairs of equipment, fuel or gas for plant, etc.

4. Working capital is an indication that the business is financed internally and not externally or by the suppliers.

5. It is a sign that the business is healthy which help Investors to know if they will invest in the business or not.

6. Working capital is used by the business for planning in order to avoid losses.

7. It provides basis for profit making by the business since it is used to buy stock (stock are goods bought for resale) from where profit will be derived.

The financial position of David Beckham enterprises as at 31st December, 1996 is as follows:
Cash in hand       7000
Creditors              3000
Debtors                 5000
Bank overdraft   1200
Loan                     4100
Stock                     8000

You are required to find the working capital of the business.

Working capital = Current assets - Current liabilities.
Current assets = stock + debtors + cash in hand
= 8000+5000+7000 = 20000

Current liabilities = Creditors + bank overdraft + loan
= 3000+1200+4100 = 8300

Therefore, Working capital = 20000-8300 = 11,700