What is Floating Capital?
Floating Capital refers to currency not presently invested or committed and therefore available to cover any near-term business expenses.
“The difference between current assets and current liabilities.” -New York University
Understanding
Floating Capital, also referred to as working capital or circulating capital, is most often the difference between a business’s current assets and current liabilities. Therefore, it is the portion of a business’s capital that is not invested in fixed or long-term assets. The term means the opposite of “sunk capital” which generally involves using funds for one main purpose such as a fax machine or printer.
Having readily available cash is necessary to finance the short-term needs of a business. The concept insinuates currency in circulation, which a company must make available to cover current assets when needed. It is commonly used for raw material costs during various phases of the production cycle, as well as transportation and storage costs.
An organization that lacks sufficient cash is likely to experience serious disruptions across the entire organization. Therefore, liquidity is a necessary and important component for all enterprises.
Examples – How is Floating Capital Used?
Typically, it is used to cover the following:
- Wages
- Supplies
- Inventory
- Accounts receivable
- Prepaid expenses
- Marketable securities
Additional Resources
Similar terms include:
What is Capital Turnover? Examples
Realization Rate: What is it?
What is a Credit Sweep?
