What is Working Capital?
Working capital is the amount by which current assets (cash, checking and savings account balances etc.) exceed current liabilities.
What is Working Capital like?
Working capital is similar to Fixed Capital in that both assets are important in the ongoing functions of a business.
Fixed capital assets are those that are considered to be long-term or durable and can be used repeatedly over a long period of time as part of the business operation.
Working capital refers to assets that are acquired and then used in business operations for a shorter period of time.
What is the purpose of a Working Capital?
The purpose of Working Capital is to enable the day to day running of the business as well as measuring how much liquid assets a company has to build its business. It ensures you have enough cash to pay your debts and expenses as they fall due, particularly during your start-up period.
What are the different types of Working Capital?
1. Balance Sheet View
– Gross Working Capital (GWC)
The sum of all of a company’s current assets (assets that are convertible to cash within a year or less) such as cash, checking and savings account balances, accounts receivable, short-term investments, inventory and marketable securities.
– Net Working Capital (NWC)
Net Capital is an organisations net worth (the difference that exists between what is owed and what assets are in the possession of the individual, business, or other entity), which is calculated by Total Assets minus Total Liabilities.
2. Operating Cycle View
– Permanent /Fixed Working Capital
Revenue that is expected to generate on a consistent and uninterrupted basis.
– Temporary/Variable Working Capital
Revenue coming from sources that may or may not continue.
What’s involved with determining with Working Capital?
The conventional method for determining working capital is the use of NWC.
Total current assets and current liabilities are taken into account to calculating Working Capital. All the data given in balance sheet regarding current assets and current liabilities are taken into consideration for estimating the Working Capital. Total current liabilities are deducted from total current assets to obtain the amount of Working Capital under this method.
Net Working Capital = Total Current Assets – Total Current Liabilities
Where does determining the Working Capital fit into the management of a business?
Determining the Working capital ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
How does determining Working Capital impact on different area of business?
The more cash maintained in working capital, the less the firm has to invest in long-term productive assets. In addition, cash used to fund working capital could theoretically be allocated to paying down long-term liabilities. The amount of debt a company has relative to the firm’s earnings can impact the company’s ability to take out new loans for new long-term assets. Deciding how much working capital to maintain depends on how key stakeholders view risk.
What terms are used when determining Working Capital?
Assets: Items of ownership convertible into cash e.g. cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate.
Liquid assets: Assets in the form of cash (or easily convertible into cash).
Liquidity: The availability of liquid assets to a market or company.
Liabilities: Legal debts or obligations that arise during the course of running a business.
Revenue: Income; earnings.
Cash Flow: The total amount of money being transferred into and out of a business.
Where can I find more information about determining Working Capital?
Who would most benefit from this knowledge?
• This article primarily targets an individual with no prior experience in the area.
• This knowledge would benefit workers of all job levels, organisations and industries.
• Working Capital is not covered by any jurisdiction.
• No cultural influence impacts on this area.
• Climate does impact on this area. If a service or product involves natural resources and the weather conditions are not ideal or extreme (e.g. flood) the business will lose revenue and/or become a liability that will disrupt the cash flow.