Working capital represents the amount of capital needed by the enterprise for meeting its day to day requirements. According to Shubin, “Working capital is the amount of funds necessary to cover the cost of operating the enterprise.”
Gross working capital represents the total investment in current assets which can be converted into cash within the accounting year. Net working capital is the difference between current assets and current liabilities.
Current assets include cash in hand and bank balance bills receivables, sundry debtors, short term loans and advances, inventories of stock, accrued income and prepaid expenses.
On the other hand current liabilities include bills payable, sundry creditors, accrued or outstanding expenses, short term loans, dividends payable, bank overdraft etc.
Sufficient amount of working capital is required for providing liquidity to the enterprise and at the same time to ensure its smooth or unrestricted working. Liquidity implies that the enterprise must have sufficient amount of working capital for discharging its short term obligations in time. It helps in building goodwill of the firm. More availability of adequate working capital ensures continuous functioning of the enterprise and optimum use of its installed capacity.
In the absence of sufficient working capital the functioning of the enterprise is likely to be adversely affected.