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Introduction to Working Capital > Working Capital
Working Capital
• Calculating Working Capital
• Controlling the Components of Working Capital
• Importance of Working Capital
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Introduction to Working Capital > Working Capital
Calculating Working Capital
• WC is current assets minus current liabilities. Companies want positive WC.
• WC is an signal of whether or not the company has enough assets to turn into
cash to pay upcoming expenses or debts.
• WC is a measurement of liquidity and is not a guarantee that a company can pay
for its liabilities.
Buying Food
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Introduction to Working Capital > Working Capital
Controlling the Components of Working Capital
• Increasing current assets or decreasing current liabilities increases WC, and vice
versa.
• Four common mechanisms for controlling WC are cash management, inventory
management, debtors management, and financing management.
• Having too little WC impairs a company's ability to meet it's financial obligations,
while having too much WC can also be bad because it means that there are
assets that are not being invested in the long-term.
Walmart CFO
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Introduction to Working Capital > Working Capital
Importance of Working Capital
• WC is important for large companies' ability to borrow, increase their share price,
pay expenses and short-term debts.
• WC is important for small companies that cannot access financial markets to
borrow, and for start-ups that need to survive until they break even.
• WC cannot guarantee whether a company is financially sound, but it gives some
insight.
Cash
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Appendix
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Introduction to Working Capital
Key terms
• Current Asset An asset on the balance sheet, such as cash, accounts receivable, and inventory that is expected to be sold or
otherwise used up in the near future, usually within one year or one business cycle, whichever is longer.
• Current Asset An asset on the balance sheet, such as cash, accounts receivable, and inventory that is expected to be sold or
otherwise used up in the near future, usually within one year or one business cycle, whichever is longer.
• current liabilities All liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given
firm, whichever period is longer.
• current liabilities All liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given
firm, whichever period is longer.
• liquidity Availability of cash over short term: ability to service short-term debt.
• operating liquidity The ability of a company or individual to quickly convert assets to cash for the purpose of paying operating
expenses.
• working capital A financial metric that is a measure of current assets of a business that exceeds its liabilities and can be applied
to its operation.
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Introduction to Working Capital
Buying Food
Most purchases, including food, must be made with a specific asset–cash. Not all current assets can be used to pay off expenses of debts.
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Introduction to Working Capital
Walmart CFO
Charles Holley, the Chief Financial Officer (CFO) of Wal-Mart, is in charge of making sure all of Wal-Mart's assets are allocated as optimally as possible.
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Introduction to Working Capital
Cash
Liquidity is a measurement of a company's ability to quickly turn assets into cash.
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Introduction to Working Capital
A company has $20,000 in cash, $10,000 in accounts receivable
and $45,000 in fixed assets. It has $12,5000 in accounts payable.
It owes $50,000 in two years on a note that has an annual interest
payment of $5,000. What is its working capital?
A) $7,500
B) $17,500
C) $57,500
D) $12,500
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Introduction to Working Capital
A company has $20,000 in cash, $10,000 in accounts receivable
and $45,000 in fixed assets. It has $12,5000 in accounts payable.
It owes $50,000 in two years on a note that has an annual interest
payment of $5,000. What is its working capital?
A) $7,500
B) $17,500
C) $57,500
D) $12,500
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Introduction to Working Capital
A company wants to adjust its working capital by adjusting its
current liabilities. Therefore the company should focus on its
____.
A) Debtors management.
B) Inventory management.
C) Financing management.
D) Cash management.
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Introduction to Working Capital
A company wants to adjust its working capital by adjusting its
current liabilities. Therefore the company should focus on its
____.
A) Debtors management.
B) Inventory management.
C) Financing management.
D) Cash management.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Introduction to Working Capital
Complete the following statement so that it is always true: If a
company has significant working capital, _____.
A) it is guaranteed to have enough cash to pay all of its expenses.
B) it will probably be able to obtain credit at a lower interest rate.
C) the company is growing at the highest rate possible.
D) All of these answers.
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Introduction to Working Capital
Complete the following statement so that it is always true: If a
company has significant working capital, _____.
A) it is guaranteed to have enough cash to pay all of its expenses.
B) it will probably be able to obtain credit at a lower interest rate.
C) the company is growing at the highest rate possible.
D) All of these answers.
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Introduction to Working Capital
Attribution
• Wikipedia. "Working capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Working_capital
• Wikipedia. "Current liabilities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current_liabilities
• Wiktionary. "liquidity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidity
• Wikipedia. "Current Asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current%20Asset
• Wikipedia. "Working capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Working_capital
• Wikibooks. "Sustainable Business/Can you afford to start up?." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Sustainable_Business/Can_you_afford_to_start_up%253F#Working_capital
• Wiktionary. "working capital." CC BY-SA 3.0 http://en.wiktionary.org/wiki/working+capital
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/operating-liquidity
• Wikipedia. "Working capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Working_capital
• Wikipedia. "Current Asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current%20Asset
• Wikipedia. "Current liabilities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current_liabilities
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