Differentiate between capital account and current account….Difference between working capital and fixed capital.

Define the four factors of production—labour, capital, natural resources and entrepreneur.

Labor as a Factor of Production While the owners of a business may own the other factors of production, they must pay for labor in the form of wages. According to Marxist theories of economics, labor is the key factor of production and the basis for the labor theory of value.

In national accounts, fixed capital is conventionally defined as the stock of tangible, durable fixed assets owned or used by resident enterprises for more than one year. This includes plant, machinery, vehicles and equipment, installations and physical infrastructures, the value of land improvements, and buildings.

Sources of Working Capital

Issue of shares is the most important source for raising the permanent or long-term capital. A company can issue various types of shares as equity shares, preference shares and deferred shares. According to the Companies Act, 1956, however, a public company cannot issue deferred shares.

For example, the sale of merchandise at a price greater than its cost is a source of working capital, because the increase in cash or receivable from the sale is greater than the decrease in inventory. Any transaction that decreases working capital is a use of working capital.

Raw materials and money in hand are called working capital. Unlike tools, machines and buildings, these are used up in production.

Working capital serves as a metric for how efficiently a company is operating and how financially stable it is in the short-term. The working capital ratio, which divides current assets by current liabilities, indicates whether a company has adequate cash flow to cover short-term debts and expenses.

Manage debtors effectively. The best way to ensure you have enough working capital available is to make sure money is coming in on time. CFOs should review credit terms with company management to ensure that the level of credit being offered to debtors is appropriate for your company’s cash flow needs.

If a company can maintain a low level of working capital without incurring too much liquidity risk, then this level is beneficial to a company’s daily operations and long-term capital investments. Less working capital can lead to more efficient operations and more funds available for long-term undertakings.

In addition to increasing working capital, a company can improve its working capital by making certain that its current assets are converted to cash in a timely manner. For example, if a company can better manage its inventory and its accounts receivable, the company’s cash and liquidity will increase.