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Definition: Types of Working Capital
In the Assets side of a Balance sheet, there are 2 types – Current Assets & Fixed Assets. Current assets are used to finance the day-to-day operations of the business and can be readily converted to cash. It is used to pay off the current liabilities which are due within one year’s time. Examples of Current Assets are Cash, Inventory, Accounts Receivables etc. These current assets are called as Working Capital.
Working capital is important for a firm to meet the daily expenses. There are two types of working capital. Those that are used in the operations are called as Operating Working Capital. Examples are Cash, Inventory & Accounts Receivables. There are current assets like Short term investments which are not used for the daily operations. These are called Non-operating Working Capital.
Based on the Working Capital, Net Working Capital is calculated which is equal to Current Assets (—) Current Liabilities. It gives the funds that will be available for operations after paying off the current liabilities.