Question

What is meant by the term working capital? How can working capital be increased or decreased?

Answer 1

The term working capital can be defined as the excess of current assets over current liabilities.

Working capital = Current Assets - Current Liabilities

Working capital can be increased if the current assets are increased without affecting current liabilities

For example: If a person invest $ 1,000 in his own firm, it will result in increase in cash by $ 1,000 without increasing the current liability, which in turn will result in increase in working capital.

Working capital can be decreased if the current assets are decreased without affecting current liabilities.

For example: $ 1,000 spent in buying a machinery. It will result in outflow of $ 1,000 of cash without affecting current liability. Hence it will result in decrease in working capital

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