Katana VentraIP

Working capital

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities.[1] If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.[2]

A company can be endowed with assets and profitability but may fall short of liquidity if its assets cannot be readily converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

(current asset)

cash and cash equivalents

(current asset)

accounts receivable

(current asset), and

inventory

(current liability)

accounts payable

Assets above or liabilities below their true

economic value

Accrual basis accounting

software as a service

One measure of cash flow is provided by the —the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

cash conversion cycle

In this context, the most useful measure of profitability is (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See economic value added (EVA).

return on capital

Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the .

cash conversion cycle

Cash conversion cycle

Operating expense

Overtrading

Quick ratio analysis

Sustainable growth rate

Trade finance

Working capital management

How to Calculate Working Capital

Value Based Working Capital Management