Define: Working Capital

UK Accounting Glossary

Definition: Working Capital


Quick Summary of Working Capital


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.



What is the dictionary definition of Working Capital?

Dictionary Definition


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.


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Full Definition of Working Capital


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:

  1. find out how much it takes to produce one unit of your product
  2. estimate how many units you can sell within a period, say, a month
  3. determine how long and how much it takes to produce the estimated units of products for sale (include delivery time for raw materials and, to be conservative, assume that you have to pay cash)
  4. estimate how long it will take to convert your goods for sale to cash (i.e., collections)
  5. determine how much you need to operate, i.e., overhead or operating expenses
  6. calculate the length of time from the delivery of materials to collection of sales proceeds
  7. multiply your overhead by the length of time determined in step 6
  8. Add the result of step 7 to the result of step 3 (also multiplied by the length of time determined in step 6). This is the optimum level of Working Capital that your business should have.

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Examples of Working Capital in a sentence


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.


Synonyms For Working Capital


circulating capital, operating capital, liquidity, cash, cashflow


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Working Capital. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/working-capital/ (accessed: February 27, 2020).
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Working Capital. PayrollHeaven.com. Retrieved February 27, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/working-capital/

Definition Sources


Definitions for Working Capital are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • BusinessDictionary.com
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd December 2018.