Working capital
Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 10, Ch 3 "Money and Credit"
Meaning
Working capital is the money needed to pay the regular, day-to-day costs of production. Examples are raw materials and workers' wages. It is used up in each round of production and has to be found again for the next round. Producers often borrow to meet working capital needs. When credit is used this way to complete profitable work, it raises earnings.
Example
A large trader orders 3,000 pairs of shoes from Salim, to be delivered within a month. Salim needs money for extra workers and for raw materials. The leather supplier gives him leather now and lets him pay later. The trader gives him a cash advance for 1,000 pairs. Salim delivers on time, repays both loans and makes a good profit (Class 10, Money and Credit).
Don't confuse with
- Fixed capital: tools, machines and buildings that are used over many years of production. Working capital, by contrast, is used up in each production cycle.