Working capital - Strategic Management

Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash requirements of its operations. Working Capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current liabilities) It refers to the amount of Current Assets that exceeds Current Liabilities (i.e. CA - CL). Working Capital refers to that part of the firm’s Capital, which is required for Financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Understanding working capital within financial management
Working capital works on much the same principle. The process of financial managementi.e. Measuring and controlling your level of working capital, ensures your business can function from day to day and have enough current assets(money) to pay your current liabilities (bills).

How is working capital calculated?
Current Assets – Current Liabilities = Working Capital
This is also sometimes called “Net Working Capital”. The figure can be positive, negative, or zero. Generally, a positive figure is seen as good. If the current assets exactly equal the liabilities the business has no reserves to meet unexpected events like repairs, stock problems, staff recruitment, etc, etc.

Current Assets

Current assets include anything that is able to be converted into money within 12 months

Some examples of current assets are:

  1. Cash or its equivalent – (overdrafts and credit cards fall under this heading)
  2. Inventory / Stock / WIP – Most businesses expect their stock to sell within 12 months
  3. Debtors – This is anybody who owes the business money, usually having purchased something on credit

Current Liabilities
These are the exact opposites of current assets. They include anything that has to be paid within 12 months and represent claims made against the business. Some examples include:

  1. Rents / Mortgages
  2. Wages
  3. Utility bills
  4. Bank Interest on loans
  5. Taxes

The Importance of working capital:
A business may be profitable but is at risk of failing if the working capital is not managed correctly. Many new businesses often fail due to working capital problems. Working Capital can be seen as the lifeblood of business.


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