- Working capital
Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts · Journal · Special journals · Constant Item Purchasing Power Accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO & LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Statement of financial position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act Accounting qualifications CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · ACCA · CIA · CTP · ICAEW · CIMA · IPA · ICAN
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
- Net Working Capital = Current Assets − Current Liabilities
- Net Operating Working Capital = Current Assets − Non Interest-bearing Current Liabilities
- Equity Working Capital = Current Assets − Current Liabilities − Long-term Debt
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be 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 assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:
- accounts receivable (current asset)
- inventory (current assets), and
- accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit.
An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.
Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:
Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances.
Cash balance items often attract a one-for-one purchase price adjustment.
Working capital management
Corporate finance Working capital Capital budgeting Sections Societal components
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
By definition, working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.
- One measure of cash flow is provided by the cash conversion cycle - 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.
- In this context, the most useful measure of profitability is Return on capital (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).
- 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.
Management of working capital
Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.
- Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
- Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Progress (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity
- Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
- Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
- Cash conversion cycle
- Working capital management
- Quick ratio analysis
- Sustainable growth rate
Types of capital By termLiquid (short) vs. Patient (long) Marxist analytical Marxist historicalSee also: Five Capitals
Wikimedia Foundation. 2010.
См. также в других словарях:
working capital — see capital Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. working capital … Law dictionary
working capital — working assets The capital that is used to finance the day to day operations of a company. Working capital is part of the balance sheet and is calculated as the difference between current assets and current liabilities. The size and composition… … Accounting dictionary
working capital — n [U] the money that is available to be used for the costs of a business →↑venture capital … Dictionary of contemporary English
working capital — ► NOUN ▪ the capital of a business which is used in its day to day trading operations … English terms dictionary
working capital — noun uncount BUSINESS the money that a business has available for immediate use … Usage of the words and phrases in modern English
working capital — n. 1. Accounting the excess of cash and liquid assets over current liabilities 2. cash and other assets needed for the day to day operation of a business … English World dictionary
working capital — the excess of current assets over current liabilities of any business at any time. Glossary of Business Terms In accounting and finance, used to describe the amount, if any, by which a business s current assets exceed its current liabilities.… … Financial and business terms
Working capital — Defined as the difference in current assets and current liabilities (excluding short term debt). Current assets may or may not include cash and cash equivalents, depending on the company. The New York Times Financial Glossary * * * working… … Financial and business terms
Working Capital — Zum Umlaufvermögen (oder Betriebskapital) eines Unternehmens gehören Vermögensgegenstände, die umlaufen beziehungsweise umgesetzt werden sollen, deren Bestand sich also durch Zu und Abgänge häufig ändert. Sie befinden sich nur kurze Zeit im… … Deutsch Wikipedia
Working Capital — A measure of both a company s efficiency and its short term financial health. The working capital ratio is calculated as: Positive working capital means that the company is able to pay off its short term liabilities. Negative working capital… … Investment dictionary