Working Capital

Knowledge Center

What is Working Capital?

Working Capital is the amount by which current assets exceed current liabilities. It is used to fund the operations of a company or non-profit organization, such as purchases of raw materials, office supplies, salaries, etc.

It can be regarded as the lifeblood of a business, because it is needed to finance the cash conversion cycle of a business: the number of days required to convert raw materials into finished goods, finished goods into sales, and accounts receivables into cash.

Along with fixed assets (such as plant and equipment), working capital is considered a part of operating capital.

Working Capital Deficiency

If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A positive working capital is vital to ensure that a firm is able to continue its operations and that it has sufficient funds available to satisfy both maturing short-term debt and upcoming operational expenses.

The Meaning of an Increase or Decrease of Working Capital

An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

How much Working Capital is Needed?

The amount of working capital needed varies with a number of factors, including: type of industry, efficiency of production processes, economies of scale, seasonality, sales success, etc. A (temporary) shortage in the working capital can easily lead to bankruptcy of a small firm, even if it has many profitable orders coming. In debt contracts, the borrower may be obliged to maintain certain levels of working capital. Such clauses are called Affirmative Debt Covenants.

Sources of Working Capital

Internal sources include: retained earnings, savings through achieving operating efficiencies, allocation of cash through depreciation, deferred taxes.

External sources include: short-term borrowings, trade credit, accounts receivables factoring.

Working Capital Management

This involves managing the relationship between a firm's short-term assets and its short-term liabilities via a combination of policies and techniques, such as cash (flow) management, inventory management, debt management and short term financing. The aim of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Forum Forum about Working Capital. Net Working Capital vs. Gross Working Capital Working Capital is a measurement of SHORT-TERM LIQUIDITY of a business enterprise. Mathematically it is calculated by subtracting current liabilities from current assets of the business enterprise.... 37   Marginal Profitability from Relaxing Credit Policy Suppose the annual sales of XYZ Ltd. is Rs. 24,000,000. After 6 months an account is turned over to a collection agency and on average one percent of the total receivable volume under the present cre... 6   What is the Meaning of a Low or High Average Collection Period? Most firms allow their customers to purchase goods or services via credit. There is nothing wrong with this business practice. But one problem with allowing to buy on credit is there are risks and cos... 5   🔥 Working Capital Management Strategies Working Capital Working Capital is a term that reflects the short-term liquidity position of a company. It depicts the operational efficiency of the business which is why its management is important ... 3   Analysis of Working Capital What is working capital analysis? Companies need to manage their working capital efficiently and effectively. Working capital analysis is the process of calculating and interpreting the working capit... 3   Is Negative Working Capital Always Bad? As the summary of working capital rightly says, WC is the difference between current assets and current liabilities. It shows the liquidity position of a company. This means that it depicts the operat... 3   1 comments How to Increase Cash Payments I am a team leader of a team in my company currently charged with a responsibility of making a lot of cash sales in a newly opened branch of the company. We deal in sales of IT hardware - i.e., comput... 2   Start a new topic about Working Capital Sign up for free

Courses about Working Capital. Beginners Course Advanced Course Course for Experts

Expert Tips Advanced insights about Working Capital. Here you will find professional advices by experts. Consultancy Tips Teaching Tips Practical Implementation Tips

Information Sources Various sources of information regarding Working Capital. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.

Tools Useful tools regarding Working Capital. News Videos Presentations   Books Academic More

Compare with: Current Ratio  |  Working Capital Ratio  |  Microfinance  |  EBITDA  |  Cash Value Added  |  Return On Net Assets  |  Just In Time  |  Accounts Receivables Factoring  |  Recapitalization  |  Undercapitalization  |  3rd Party Logistics (3PL)  |  Sale and Leaseback

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing  |  Knowledge & Intangibles  |  Strategy & Innovation  |  Supply Chain & Quality

More on Management  |  Return to Management Dictionary

This ends our Working Capital summary and forum.