Working capital
Working capital is normally defined 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, working capital can be calculated as:
Stock
ADD: Trade debtors
LESS: (Trade creditors)
= Working capital
This working capital requirement has to be financed by borrowings, shareholders' funds, or a combination of both of them.
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.
Here as elsewhere, it is always best to be as clear as possible - and explicit - about the detailed definition being used.
