Page 1 - Lesson Note 6

SAI INTERNATIONAL SCHOOL

Class-12
th
Business studies

Chapter – 9, Financial Management

Topics: Working capital, meaning, Factors.
(Lesson - 35)

Apart from the investment in fixed assets every business organization needs to
invest in current assets. This investment facilitates smooth day-today operations

of the business. Current assets are usually more liquid but contribute less to the
profits than fixed assets. Examples of current assets, in order of their liquidity, are
as under.

1. Cash in hand/Cash at Bank

2. Marketable securities

3. Bills receivable

4. Debtors

5. Finished goods inventory

6. Work in progress

7. Raw materials

8. Prepaid expenses

These assets, as noted earlier, are expected to get converted into cash or cash
equivalents within a period of one year. These provide liquidity to the business.

An asset is more liquid if it can be converted into cash quicker and without
reduction in value. Insufficient investment in current assets may make it more

difficult for an organization to meet its payment obligations. However, these
assets provide little or low return. Hence, a balance needs to be struck between
liquidity and profitability. Current liabilities are those payment obligations which