Question

Explain the development of working capital concept. (i.e, the fixed capital vs circulating capital. explaining the motivation for the definitions of fixed and circulating capital , how it came from court decisions on the legality of dividends in Great Britain and so on)

Answer 1

Working capitals refers to short-term funds to meet operating expenses. It is concerned with the management of the firm’s current assets and current liabilities. Proper management of working capital is essential to a company’s fundamental financial health. The ability to utilize working capital management is to maintain a good balance between growth, profitability and liquidity.
The primary function of the financial manager is to ensure availability of finance, to fulfill different purposes such as initial promotion, fixed capital, and working capital. Fixed Capital refers to the capital, which is invested in procuring fixed assets for business. On the other hand, working capital or Circulating Capital represents the amount of money utilized for financing day to day business operations. It is required to support the proper functioning of the company’s business operations.

Fixed Capital and Working Capital are the two types of capital which differ on account of their usage in the business i.e. if it is utilized to serve long term requirements, they are terms as fixed capital, while if it serves short term requirements, it is called as working capital. Fixed Capital is relatively illiquid because it mainly consists of investments in land, plant and machinery, etc whereas Circulating Capital is highly liquid as it consist of investments in stock, accounts receivable, etc.