## Working Capital – Meaning and Concepts
### Accounting Definition
$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$
### Current Assets
An asset is current when:
- Expected to be realised, sold, or consumed within the normal operating cycle or 12 months (whichever is longer), OR
- Held primarily for trading in the ordinary course of business.
Categories of Current Assets:
1. Inventory (raw materials, WIP, finished goods)
2. Receivables (trade receivables, bills receivable)
3. Cash and cash equivalents (including short-term marketable securities)
4. Prepaid expenses
5. Other current assets (short-term loans/advances, accrued revenue)
### Current Liabilities
A liability is current when:
- Expected to be settled within the normal operating cycle or 12 months (whichever is longer), AND
- Settled by using current assets or creating a new current liability.
Categories of Current Liabilities:
1. Payables (trade payables, bills payable)
2. Outstanding payments (wages, salaries, overheads)
3. Other current liabilities (short-term borrowings, provision for taxes)
### Working Capital Management
Process of monitoring and utilising current assets and liabilities efficiently to:
- Maintain sufficient cash flow for day-to-day operating expenses.
- Meet short-term obligations on time.
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## Types of Working Capital
### (A) Based on Value
| Type | Definition |
|---|---|
| Gross Working Capital | Total investment in all current assets |
| Net Working Capital | Current Assets − Current Liabilities |
### (B) Based on Time
| Type | Definition | Financing |
|---|---|---|
| Permanent WC | Minimum level of current assets always required; does not fluctuate with sales cycles | Long-term sources |
| Temporary / Fluctuating WC | Extra WC needed above permanent level due to seasonal or short-term demand variations | Short-term sources |