<\/span>Forms of Working Capital<\/span><\/h2>\n\n\n\nWhile the types of capital are based on time and purpose, the forms refer to the physical or financial state of the money. Capital constantly changes its shape as it cycles through the daily business operations. Here are the three main forms of working capital:<\/p>\n\n\n\n
\n- Cash:<\/strong> This is the absolute most liquid form of capital. Cash includes physical currency in the cash box and liquid funds sitting in the company’s bank accounts. Businesses rely heavily on cash to make immediate payments, such as buying emergency supplies or paying daily worker wages.<\/li>\n\n\n\n
- Inventory:<\/strong> A very large portion of funds is usually tied up directly in physical goods. Inventory takes three different shapes. These are raw materials waiting to be processed, work-in-progress goods sitting on the factory floor, and finished goods waiting in the warehouse to be sold to consumers.<\/li>\n\n\n\n
- Receivables:<\/strong> When a business sells goods on credit, it does not get the cash immediately. The amount owed by the customers is recorded as accounts receivable. Receivables show that the company has earned the revenue, but the actual physical money has not arrived yet.<\/li>\n<\/ul>\n\n\n\n
These forms are deeply and constantly interconnected. A business uses its cash to buy inventory. The inventory is then sold on credit, creating new receivables. Finally, the company collects the pending receivables, converting them back into pure cash.<\/p>\n\n\n\n
This continuous loop is formally known as the operating cycle. If any part of this specific cycle gets blocked, the entire business engine slows down drastically. To track how efficiently a company manages this cycle, financial analysts use specific performance metrics. One such important metric is the Working Capital Turnover Ratio.<\/p>\n\n\n\n
Working Capital Turnover Ratio = Net Sales \/ Average Working Capital<\/strong><\/p>\n\n\n\nA higher ratio clearly shows that a business is generating more sales for every single rupee of capital used. This level of efficiency is what every successful company strives to achieve.<\/p>\n\n\n\n