SS2 Commerce Third Term: Capital (cont’d)

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

 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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SS2 Commerce Third Term: Capital (cont’d)

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