Working Capital


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Working Capital calculator measures if the business is able to pay off its short-term liabilities with its current assets or the operating liquidity available. Working capital formula is:

 Working capital formula


Definitions and terms used in Working Capital Calculator

Current Assets
The assets that are expected to be converted into cash or otherwise used up within a year or one business cycle (whichever is longer). Typical current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, the portion of prepaid expenses which will be used within a year and other assets that could be converted to cash in less than one year.
Current Assets = Cash + Bank + Accounts Receivable + Marketable Securities + Inventory + Prepaid Expenses
Current Liabilities (short term debt)
Obligations or debts that are due within one fiscal year or the operating cycle. For example, accounts payable, accrued liabilities, dividends, unpaid taxes and other debts that are due within one year.

What is Working Capital

Working capital is a financial measurement of the operating liquidity available to a business. It is also known as net working capital or working capital ratio.

Working capital formula is:

 Working capital formula

Working Capital Analysis

Positive working capital means that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations.

Negative working capital means that the business currently is unable to meet its short-term liabilities with its current assets. Therefore, an immediate increase in sales or additional capital into the company is necessary in order to continue its operations.

Working capital also gives an idea of company’s efficiency. Money tied up in inventory or accounts receivable cannot pay off any of the company’s short term financial obligations. Therefore, working capital analysis is very important, but very complex too. For example, an increase in working capital can be explained by sales increase, but can also be explained by slow collection or inadequate increase in inventory.


Working Capital management

Working capital management refers to the decisions relating to working capital and short-term financing. The goal of working capital management is to ensure that the company is able to continue its operations and that it has sufficient cash flow to satisfy the short-term debt and operating expenses. These involve managing the current assets and the current liabilities of the company.

Most common policies and techniques for the management of working capital are:

  • Cash management: identify the optimal balance. This allows a business to meet day to day expenses and payments, but reduces cash holding cost;
  • Inventory management: identify the optimal level of inventory. This allows a business continue uninterrupted its production but reduces the investment in raw materials, minimizes reordering cost and hence increase cash flow;
  • Debtors’ management: identify the appropriate credit policy. This allows a business to use credit terms which will attract more customers but the impact on cash flow will be offset by increased revenues;
  • Short term financing: identify the appropriate source of financing, by choosing between supplier credit (ideal for inventory financing), bank loan or factoring (accounts receivable financing), or create a mix of financing.

A company can be endowed with assets and profitability but short of liquidity if these assets cannot readily be converted into cash.