Circulating capital definition

What is Circulating Capital?

Circulating capital refers to the funds being constantly used to pay for core business operations, which are any activities involved in the creation of goods and services. This can include accounts receivable, all types of inventory, and operating expenses. The amount of circulating capital within a business can be evaluated by comparing it to the average amount of circulating capital used by competitors.

What is Fixed Capital?

The other type of capital is fixed capital; the term refers to funds invested in a business for more than one cycle of production (which is typically no more than a year). To increase the return on investment, management can focus on minimizing the amount of fixed capital. Doing so leaves what may be a substantially reduced amount of capital to fund a business.

Presentation of Circulating Capital

Circulating capital is always classified as short-term, which means that it is expected to be liquidated within one year. This means that all circulating capital will appear within the current assets section of a reporting entity’s balance sheet.