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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 utilized for the day-to-day operations and immediate debts of a business. It is essential for managing the everyday expenses and ensuring liquidity. Working Capital is typically financed through short-term sources, like bank overdrafts or lines of credit, as both debtors and stock can be converted into cash in the short term.
Step 2
Equity Capital
Answer
Equity Capital, on the other hand, is regarded as a long-term source of finance. It serves to fund permanent assets of a business. This type of capital represents ownership in the company and does not need to be repaid like a loan. A significant benefit of using equity capital is that there is no obligatory commitment to provide dividends to shareholders each year, which offers flexibility in financial management.