Importance of Working Capital
- It helps to determine the funds that will be available for running a business.
- It helps to know if the business is solvent or not i.e to know if the business have the ability to settle debt without selling fixed asset
- It serves as a check against holding down too much money for current asset.
- It is a sign to show the healthiness of a business, working capital help an investor to know if to invest in a business or not.
- Working capital helps to determine the funds that will be available for the running of the business on a daily basis.
- The life span of any business depends on its working capital
- It helps bankers in determining either to grant loan or overdraft to customers.
Calculation of Working Capital
It is the money used by the business to finance routine expenses.
Working Capital= Current Assets- Current Liabilities
Working Capital Ratio
Ratio show the extent of business financial stability
Working Capital Ratio = Current Assets / Current Liabilities
Working Capital should ideally between 1 and 2.
Meaning Of profit
To the layman, profit can be defined as the financial gain or benefit which a firm realizes from his business or transaction dealings. Profit also relates to the gain resulting from investing one’s capital in a business. The purpose or motive of any business is to make profit.
To the economist profit is the reward an entrepreneur gets for risk taking in starting a business or a company while the accountantsees profit as the excess of income over expenditure. He views profit from two perspective: Gross profit and net profit.
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