What is meant by 'circulating capital'?

Circulating capital refers to the assets that a business utilizes to fund its ongoing operations and meet its short-term financial obligations. This includes items that are easily convertible to cash or are expected to be used within a single operating cycle, such as cash, inventory, and receivables.

Current asset items like cash and inventories are crucial for daily operations, enabling a company to purchase goods, pay employees, and manage immediate expenses. These assets can be quickly accessed or converted into cash to facilitate transactions and support operational continuity. This concept is significant in financial management, as it helps businesses ensure they have sufficient liquidity for their day-to-day activities.

In contrast, long-term investments and fixed assets are categorized differently since they are not typically involved in the immediate operational cash flow but instead contribute to the overall value and production capacity of the entity over a longer timeframe. Liabilities, on the other hand, represent obligations that need to be settled and are not considered capital in the sense of supporting ongoing operations.