A business has two types of capital:
• fixed capital in the form of non-current assets, such as premises, machinery and equipment;
• working capital to fund the business operations over the short term.
Working capital consists of the current assets and the current liabilities of the business and is calculated as follows:
Working capital = Current assets (inventory, trade receivables and cash)
less Current liabilities (trade payables and bank overdraft)
Current liabilities represent the short-term debts of the business which will require payment in the near future. Cash will be the medium by which these short-term debts will normally be repaid and settled, but having assets which are ...