Working Capital
What is working capital?
Working capital is essentially the money you need to keep yourself going in the time between paying out for raw materials or stock and getting in money from the people you sell to. So for example, paying the wages of the staff needed to produce the goods. In accounting terms it is the amount of current assets minus current liabilities.
Where have you heard about working capital?
Financial news reports may sometimes mention working capital, for example, a company talking to banks for a loan to increase working capital after they have suffered a setback or unexpected price rises in supply costs. Others may mention companies cracking down on their management of working capital, for example, leading pharmaceutical companies freeing up working capital by adjusting when they pay suppliers according to analysts in a Reuters report.
What you need to know about working capital.
Working capital can be a good indicator of the short-term financial health of a company - the company easily has sufficient money to pay its debts. A high level of working capital indicates strong liquidity in a company.
Factors that affect working capital will be how soon a company pays its suppliers, and how soon its customers pay up. So the terms a business negotiates with suppliers and customers can impact the level of working capital. Working capital requirements are also lower for businesses that don't hold large levels of stock.
Find out more about working capital.
See also accounts payable and accounts receivable.
