## Meaning, Components and Concepts of Working Capital
### 1. Accounting Definition
Working Capital = Current Assets – Current Liabilities
This difference is also called Net Working Capital (NWC).
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### 2. Current Assets
An asset is classified as current if:
- Expected to be realised, sold, or consumed within the normal operating cycle OR within 12 months after the reporting period (whichever is longer); OR
- Held primarily for trading in the ordinary course of business.
Components for WC Management:
| Category | Examples |
|---|---|
| Inventory | Raw materials, WIP, finished goods |
| Receivables | Trade receivables, bills receivable |
| Cash & Equivalents | Cash, bank balances, short-term marketable securities |
| Prepaid Expenses | Insurance, rent paid in advance |
| Other Current Assets | Short-term loans/advances, accrued revenue |
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### 3. Current Liabilities
A liability is current if:
- Expected to be settled within the normal operating cycle OR within 12 months (whichever is longer); AND
- Settled by use of current assets or by creation of a new current liability.
Components for WC Management:
| Category | Examples |
|---|---|
| Payables | Trade payables, bills payable |
| Outstanding Payments | Outstanding wages, salaries, overheads |
| Other Current Liabilities | Short-term borrowings, provision for taxes |
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### 4. Working Capital Management
Definition: A process designed to ensure an organisation operates efficiently by monitoring and utilising its current assets and current liabilities to best effect.
Primary Objective: Maintain sufficient cash flows to meet day-to-day operating expenses and short-term obligations.
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### 5. Concepts of Working Capital
#### (A) Based on Value
| Concept | Definition |
|---|---|
| Gross Working Capital | Total investment in current assets |
| Net Working Capital | Current Assets minus Current Liabilities |
#### (B) Based on Time
| Type | Definition | Financed By |
|---|---|---|
| Permanent Working Capital | Minimum WC required at all times; stays invested unless operations permanently scale up or down | Long-term sources |
| Temporary / Fluctuating Working Capital | Additional WC above permanent WC, arising due to short-term fluctuations in sales volume | Short-term sources |