Working capital: Difference between revisions

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imported>Doug Williamson
(Add note about negative working capital in food retailing.)
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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 (excluding cash) 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.




In very simple terms, it 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:


Stock
Inventory


ADD: Trade debtors
ADD: Accounts receivable


LESS: (Trade creditors)
LESS: (Accounts payable)


= Working capital
= Working capital




This working capital requirement has to be financed by borrowings, shareholders' funds, or a combination of both of them.
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.
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 and consistent as possible - and explicit - about the detailed definition being used.




== See also ==
== See also ==
* [[Accounts payable]]
* [[Accounts receivable]]
* [[Capital]]
* [[Capital]]
* [[Cash flow statement]]
* [[Cash flow statement]]
* [[Efficiency ratio]]
* [[Current assets]]
* [[Current liabilities]]
* [[Factoring]]
* [[Fixed assets]]
* [[Free cash flow]]
* [[Liquidity management]]
* [[Liquidity management]]
* [[Management efficiency ratio]]
* [[Over trading]]
* [[Over trading]]
* [[Reporting on Payment Practices and Performance Regulations]]
* [[Securitisation]]
* [[Shareholders’ funds]]
* [[Supply chain finance]]
* [[Supply chain finance]]
* [[Trade creditors]]
* [[Working capital management]]
* [[Working capital management]]
[[Category:Corporate_financial_management]]

Latest revision as of 03:06, 10 January 2022

Working capital is normally defined - very broadly - as the excess of current assets (excluding cash) 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 and consistent as possible - and explicit - about the detailed definition being used.


See also