Business, Legal & Accounting Glossary
Finance provided to support the short-term assets of the business (stocks and debtors) to the extent that these are not financed by short-term creditors. It is calculated as current assets minus current liabilities.
noun
Working capital (also known as net working capital) is the capital used to finance the day-to-day operations of a company.
It’s included in the balance sheet and is calculated as the difference between current assets and current liabilities.
Working Capital = Current Assets – Current Liabilities
Defined as the difference between 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 part of the capital of a business that is not tied up in land, buildings or fixed equipment.
Working capital is the excess of current assets less current liabilities.
The figure represents the amount of resources the business has in a form that is readily convertible into cash.
Working Capital is used to hold liquid balances, pay for wages and materials, and to extend credit to consumers.
If you do not put up enough money for Working Capital, you will be forced to incur debt or inordinately prolong accounts payable so that you get into trouble with your suppliers. Not having adequate Working Capital will place your business in an unsustainable cycle of debt.
After you have determined the amount you need for the fixed assets you have to acquire to be able to operate, you have to add to this amount what you need for Working Capital.
To Determine Working Capital:
The company will need to budget a certain amount of working capital in order to get the store refurbished.
The CFO’s goal is to keep the level of working capital high enough that the business never has an issue with liquidity.
circulating capital
operating capital
liquidity
cash
cashflow
Average cost of capital
Capital
Capital account
Capital adequacy
Capital allocation decision
Capital appreciation
Capital asset
Capital asset pricing model
Capital budget
Capital budgeting
Capital cost allowance
Capital expenditure
Capital flight
Capital gain
Capital gains yield
Capital impairment rule
Capital lease
Capital loss
Capital market
Capital market efficiency
Capital market imperfections view
Capital market line
Capital rationing
Capital stock
Capital structure
Capital surplus
Change in net working capital
Complete capital market
Cost of capital
Cost of limited partner capital
Debt capital
Debt to capital ratio
Dedicated capital
Efficient capital market
Equity capital
Exchange rate risk capital budgeting
Financial or capital lease
Gigo garbage in, garbage out in capital budgeting
Hard capital rationing
Human capital
Invested capital
Issued share capital
Legal capital
Marginal cost of capital
Marginal cost of capital schedule
Net working capital
Net working capital recapture
Nondiversifiability of human capital
Opportunity cost of capital
Optimal capital structure
Other capital
Outstanding share capital
Pecking order view of capital structure
Perfect capital market
Perfect market view of capital structure
Personal tax view of capital structure
Pie model of capital structure
Planned capital expenditure program
Pro forma capital structure analysis
Real capital
Real options capital budgeting
Regulatory capital
Risk capital budgeting
Soft capital rationing
Sophisticated approaches to capital budgeting
Static theory of capital structure
Target capital structure
Taxable capital gain
Total capital
Uniform net capital rule
Venture capital
Weighted average cost of capital
Working capital management
Working capital ratio
Current assets, which represent the portion of investment that circulates from one form to another in the ordinary conduct of business.
Current assets minus current liabilities
Also known as net working capital. It is calculated by subtracting current liabilities from current assets. If a company’s current assets do not exceed its current liabilities, then it may be unable to meet its short-term liabilities with its current assets (such as cash, accounts receivable, and inventory).
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.
Working capital represents the amount of liquidity available to a company’s operations.
Working capital measures how liquid a company’s assets are — that is, how easily they are convertible to cash to supply the day-to-day operational needs of the organization. As such, it provides a measure both of how efficient a company’s operations are and how healthy its short-term finances are.
Significant and sustainable working capital provides a company with the flexibility to expand and improve its operations as well as respond to changing economic circumstances.
Working capital is calculated by subtracting current liabilities from current assets. If liabilities exceed assets, the company is said to have a working capital deficit.
Working capital is also known as “net working capital,” “net current assets,” or “current capital.”
Working capital, also called net working capital, is a liquidity ratio that measures a company’s ability to pay off its current liabilities with its current assets. Working capital is calculated by subtracting current liabilities from current assets.
Working capital is an important concept for creditors because it shows how well companies can pay off their current obligations without depleting any of their long-term assets. In other words, creditors want to see that companies can produce enough income, cash, and receivables to pay for current obligations as they come due. This shows how liquid the company is.
If companies can’t pay off their current liabilities with current assets, they will have to sell off long-term assets. By selling these revenue-generating long-term assets, the company decreases future possibilities of revenue. Obviously, creditors are concerned with not only a company’s ability to meet current obligations but also the company’s long-term sustainability and growth. Companies that sell long-term assets to pay for current obligations instead of using working capital is a sign that the company’s operations are failing.
Companies with sufficient amounts of working capital can carry inventory, take advantage of cash discounts, and finance current acquisitions with current liabilities.
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This glossary post was last updated: 25th January, 2022 | 0 Views.