Working capital: Difference between revisions
imported>Doug Williamson (Expand to mention cash and overdraft balances being included or excluded.) |
imported>Doug Williamson (Expand following John Mardle's email of 12 February 2017.) |
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Working capital is normally defined as the excess of current assets over current liabilities. | Working capital is normally defined - very broadly - as the excess of current assets over current liabilities. | ||
It represents the day to day capital requirement to continue the operations of the organisation. | It represents the day to day capital requirement to continue the operations of the organisation. | ||
Ignoring any cash or overdraft balances for now, in very simple terms, working capital can be calculated as: | Ignoring any cash or overdraft balances for now, in very simple terms, a measure of working capital can be calculated as: | ||
Inventory | |||
ADD: | ADD: Accounts receivable | ||
LESS: ( | LESS: (Accounts payable) | ||
= Working capital | = Working capital | ||
This working capital requirement has to be financed by borrowings, shareholders' funds, or a combination of | This working capital requirement has to be financed in some way, or usually a combination of different ways. | ||
For example by borrowings, shareholders' funds, external parties including supply chain finance, factoring, securitisation, or a combination of these. | |||
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*Whether the cash or overdraft is considered to be an operating item or part of financing | *Whether the cash or overdraft is considered to be an operating item or part of financing | ||
*The purposes for which the working capital figure is being calculated and used. | *The purposes for which the working capital figure is being calculated and used. | ||
Other issues of definition and inclusion / exclusion arise in respect of supply chain finance/prepayments, revenue recognition accounting rules and their application in different sectors. | |||
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== See also == | == See also == | ||
* [[Accounts payable]] | |||
* [[Accounts receivable]] | |||
* [[Capital]] | * [[Capital]] | ||
* [[Cash flow statement]] | * [[Cash flow statement]] | ||
* [[Efficiency ratio]] | * [[Efficiency ratio]] | ||
* [[Factoring]] | |||
* [[Liquidity management]] | * [[Liquidity management]] | ||
* [[Over trading]] | * [[Over trading]] | ||
* [[Securitisation]] | |||
* [[Shareholders’ funds]] | |||
* [[Supply chain finance]] | * [[Supply chain finance]] | ||
* [[Working capital management]] | * [[Working capital management]] | ||
Revision as of 18:56, 12 February 2017
Working capital is normally defined - very broadly - as the excess of current assets over current liabilities.
It represents the day to day capital requirement to continue the operations of the organisation.
Ignoring any cash or overdraft balances for now, in very simple terms, a measure of working capital can be calculated as:
Inventory
ADD: Accounts receivable
LESS: (Accounts payable)
= Working capital
This working capital requirement has to be financed in some way, or usually a combination of different ways.
For example by borrowings, shareholders' funds, external parties including supply chain finance, factoring, securitisation, or a combination of these.
Working capital can be negative, for example in food retailing.
Alternative definitions of working capital may include any short-term cash or overdraft balances of the organisation.
This inclusion (or exclusion) of cash and overdrafts may depend on:
- Whether the cash or overdraft is considered to be an operating item or part of financing
- The purposes for which the working capital figure is being calculated and used.
Other issues of definition and inclusion / exclusion arise in respect of supply chain finance/prepayments, revenue recognition accounting rules and their application in different sectors.
Here as elsewhere, it is always best to be as clear as possible - and explicit - about the detailed definition being used.
