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Differentiate between Working Capital and Equity Capital. - Leaving Cert Business - Question 3 - 2008
Question 3
Differentiate between Working Capital and Equity Capital.
Worked Solution & Example Answer:Differentiate between Working Capital and Equity Capital. - Leaving Cert Business - Question 3 - 2008
Step 1
Working Capital
Answer
Working Capital refers to the short-term source of finance that a business utilizes for its day-to-day operations. It is essentially the funds available for the immediate debts and expenses of the business.
Working Capital can be financed through short-term sources like bank overdrafts. Additionally, it encompasses the conversion of both debtors and stock into cash over the short term. This capital is crucial for maintaining liquidity and operational efficiency.
Step 2
Equity Capital
Answer
Equity Capital represents a long-term source of financing for a business. It constitutes the permanent capital used to fund the acquisition of permanent assets. One of the primary advantages of utilizing equity capital is that it does not impose an obligation on the company to distribute dividends to equity shareholders annually. This flexibility allows companies to reinvest profits back into the business rather than committing a portion to shareholders consistently.