Working Capital is an amount of money borrowed from a bank or other lender and used by a new

business for money to keep operations going and pay business bills during the startup period, when
income is usually less than expenses. For many new businesses, having enough working capital means
the difference between the success and failure of the business.
Working capital is a liquidity (cash)concept. A business might show a "profit," but if it cannot maintain a
positive cash position (that is, having money in the bank to pay bills each month), the business cannot
continue to operate.

How to Calculate Working Capital

If you're running a business, you must have a working capital. Working capital is the measure of
cash or liquid assets essential for its day-to-day operation. By calculating your working capital,
you can find out the value of your current assets and if you are able to meet your financial
obligations. It is simply the current assets in excess of current liabilities.

Calculate Working Capital Step 1
Version





Total your current assets.
This includes cash and assets that are liquid or easily converted into cash
within 1 year, such as accounts receivable, prepaid expenses, inventory, and
securities (e.g. stocks, bonds).
The value of your current assets is your gross working capital. After deducting
current liabilities from your current assets, you get the amount of your net
working capital.



On the basis of Operating Cycle View, types of working capital are as below:
Permanent / Fixed Working Capital: Dealing with current asset and fixed assets is totally different.
Determining the financing requirement in case of fixed assets is simply the cost of the asset. Same is
not true for current assets because value of current assets is constantly changing and it is difficult to
accurately forecast that value at any point of time. To simplify the complexity to some extent, on the
basis of past trend and experience, we can find a level below which current asset has never gone.
The current assets below this level are called permanent or fixed working capital. See the example
below:
Types of Working Capital
Net Working
Capital
Permanent / Fixed
Working Capital
Temporary / Variable Working
Capital Requirement
3000 2500 500
2500 2500 0
2800 2500 300
3200 2500 700
In the example, 2500 is the permanent working capital below which the net working capital has not
gone.
Regular Working Capital: It is the permanent working capital which is normally required in the
normal course of business for the working capital cycle to flow smoothly.
Reserve Working Capital: It is the working capital available over and above regular working capital.
It is kept for contingencies which may arise due to unexpected situations.
Temporary / Variable WC:Temporary working capital is easy to understand after getting hold over
permanent working capital. In simple terms, it is the difference between net working capital and
permanent working capital. The main characteristic which can be made out from the example is
fluctuation. The temporary working capital therefore cannot be forecasted. In the interest of
measurability, this can be further bifurcated as below which can create at least some base to
forecast.
o Seasonal Working Capital:Seasonal working capital is that temporary increase in working capital
which is caused due to some relevant season for the business. It is applicable to businesses
having impact of seasons for example, manufacturer of sweaters for whom relevant season is the
winters. Normally, their working capital requirement would increase in that season due to higher
sales in that period and then go down as collection from debtors is more than sales.
o Special Working Capital: Special working capital is that rise in temporary working capital which
occurs due to a special event which otherwise normally does not take place. It has no basis to
forecast and has rare occurrence normally. For example, country where Olympic Games are
held, all the business require extra working capital due to sudden rise in business activity.
It was all about the types of working capital. It needs to be managed with several working capital
techniques so as to have the effective working capital management.


Calculate Working Capital Step 2
Version 2.jpg



Total your current liabilities.
These are the liabilities that need to be paid within 1 year such as accounts payable,
wages, dividends, and taxes.


Working capital
From Wikipedia, the free encyclopedia

This article needs additional citations for verification. Please help improve this
article by adding citations to reliable sources. Unsourced material may be challenged
and removed. (May 2014)
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available
to a business, organization or other entity, including governmental entity. Along with fixed assets
such as plant and equipment, working capital is considered a part of operating capital. Gross
working capital equals to current assets. Net working capital (NWC) is calculated as current
assets minus current liabilities.
[1]
It is a derivation of working capital, that is commonly used in
valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current
liabilities, an entity has a working capital deficiency, also called a working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if its assets cannot
readily be converted into cash. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing inventories,
accounts receivable and payable, and cash.
Contents
[hide]
1 Calculation
o 1.1 Inputs
o 1.2 working capital cycle
2 Definition
3 Meaning
4 Working capital management
o 4.1 Decision criteria
o 4.2 Management of working capital
5 See also
6 References
7 External links
Calculation[edit]
The basic calculation of the working capital is done on the basis of the gross current assets of the
firm.
Inputs[edit]
Current assets and current liabilities include three accounts which are of special importance. These
accounts represent the areas of the business where managers have the most direct impact:
accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a short-term
claim to current assets and is often secured by long term assets. Common types of short-term debt
are bank loans and lines of credit.
An increase in net working capital indicates that the business has either increased current
assets (that it has increased its receivables, or other current assets) or has decreased current
liabilitiesfor example has paid off some short-term creditors, or a combination of both.
working capital cycle[edit]
Definition[edit]
The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and
current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its
working capital without earning a return on it. Therefore, companies strive to reduce its working
capital cycle by collecting receivables quicker or sometimes stretching accounts payable.
Meaning[edit]
A positive working capital cycle balances incoming and outgoing payments to minimize net working
capital and maximize free cash flow. For example, a company that pays its suppliers in 30 days but
takes 60 days to collect its receivables has a working capital cycle of 30 days. This 30 day cycle
usually needs to be funded through a bank operating line, and the interest on this financing is a
carrying cost that reduces the company's profitability. Growing businesses require cash, and being
able to free up cash by shortening the working capital cycle is the most inexpensive way to grow.
Sophisticated buyers review closely a target's working capital cycle because it provides them with an
idea of the management's effectiveness at managing their balance sheet and generating free cash
flow.
Working capital management[edit]
Corporate finance

Working capital
Cash conversion cycle
Return on capital
Economic Value Added
Just-in-time
Economic order quantity
Discounts and allowances
Factoring
Sections
Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action
Societal components
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and banking
Financial regulation
Clawback
V
T
E
Decisions relating to working capital and short term financing are referred to asworking capital
management. These involve managing the relationship between a firm's short-term assets and
its short-term liabilities. The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt
and upcoming operational expenses.
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.
Decision criteria[edit]
By definition, working capital management entails short-term decisionsgenerally, relating to the
next one-year periodwhich are "reversible". These decisions are therefore not taken on the same
basis as capital-investment decisions (NPV or related, as above); rather, they will be based on cash
flows, or profitability, or both.
One measure of cash flow is provided by the cash conversion cyclethe net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
In this context, the most useful measure of profitability is return on capital (ROC). The result is
shown as a percentage, determined by dividing relevant income for the 12 months by capital
employed; return on equity (ROE) shows this result for the firm's shareholders. Firm value is
enhanced when, and if, the return on capital, which results from working-capital management,
exceeds the cost of capital, which results from capital investment decisions as above. ROC
measures are therefore useful as a management tool, in that they link short-term policy with
long-term decision making. See economic value added (EVA).
Credit policy of the firm: Another factor affecting working capital management is credit policy of
the firm. It includes buying of raw material and selling of finished goods either in cash or on
credit. This affects the cash conversion cycle.
Management of working capital[edit]
Guided by the above criteria, management will use a combination of policies and techniques for the
management of working capital. The policies aim at managing the current
assets (generally cash and cash equivalents, inventories and debtors) and the short term financing,
such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for uninterrupted production
but reduces the investment in raw materialsand minimizes reordering costsand hence
increases cash flow. Besides this, the lead times in production should be lowered to
reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level
as possible to avoid over productionsee Supply chain management; Just In
Time (JIT); Economic order quantity (EOQ); Economic quantity
Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract
customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue and hence Return on Capital (orvice versa); see Discounts and allowances.
Short term financing. Identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be
necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
See also[edit]
Cash conversion cycle
Working capital management
Overtrading
Quick ratio analysis
Sustainable growth rate
References[edit]
1. Jump up^ Gross Working Capital vs Net working Capital
External links[edit]
How to Calculate Working Capital
Value Based Working Capital Management
Working Capital Management and Profitability Case of Pakistani Firms
Impact of Working Capital Management on Firms Performance: Evidence from Non-Financial
Institutions of KSE-30 index
[hide]
V
T
E
Types of capital

Academic
Accumulation of capital
Circulating/Floating
Cultural
Cross-cultural
Educational
Financial
Fixed
Human
Individual
Information
Instructional
Intellectual
Natural
Organizational
Physical
Political
Public
Sexual
Social
Spiritual
Symbolic
Venture
Working

By term
Liquid (short) vs. Patient (long)

Marxist analytical
Constant
Variable
Fictitious

Marxist historical
Monopoly
Financial capital

See also: Five Capitals



working capital


Definitions (2) Add to FlashcardsSave to FavoritesSee Examples
1. The cash available for day-to-day operations of an organization. Strictly speaking,
one borrows cash (and not working capital) to be able to buy assets or
to pay for obligations. Also called current capital.
2.
Accounting: Net liquid assets computed by deducting current liabilities from current
assets. The amount of available working capital is a measure of a firm's ability to meet
its short-term obligations.
Sources of working capital are (1) net income, (2) long-term loans, (3) sale of capital
assets, and (4) injection of funds by stockholders. Ample working capital
allows management to take advantage of unexpected opportunities, and to qualify
for bank loans and favorable trade creditterms. In the normal trade cycle of a company,
working capital equals working assets. Also called net current assets.


Read more: http://www.businessdictionary.com/definition/working-capital.html#ixzz37eMOK3BC

Characteristics of Working Capital


A business requires funds in order for it to be successful in the wide industry of corporations.
This will serve as the lifeblood of the company for without it, the business will also be nothing.
For this, it is a must for all business owners to be able to know all about the characteristics of working
capital as well as the other aspects that come with it.
There are several things that any business owner must know when working capital is concerned. Being
aware of these things will help a lot in order to assure success in the business.
Working Capital Defined
Aside from serving as fixed assets financing, all business definitely need funds on a regular basis in order
for its operations to continue. This will encompass the expenses made for raw material purchases,
manufacturing, followed by selling and finally administrating the sold until money is realized. Business
transactions are usually made on credit with several days elapsing before the proceeds of the sale will be
able to pay for it. Although most of the materials can be bought on credit, any business will still have to
pay the employees, meet the expenses for manufacturing and selling such as power, wages,
transportation, supplies and communication as well as balance the purchases of the raw materials.
Working capital basically means as the financing source needed by the business entities on a regular
basis so that needs will be met.
Characteristics of Working Capital
Needs that are Short Term: Working capital is being utilized in acquiring current assets which will
be converted to cash for a short period only.
Circular Movement: Working capital is being converted to cash constantly which will just be
turned as a working capital all over again.
Permanency: Although it is just a kind of short term capital, working capital is needed by a
business forever and always.
Fluctuation: Working still fluctuates every now and then even it is something permanent.
Liquidity: It is very liquid for it can be converted as cash any time without losing anything.
Less Risky: Investments in current assets such as working capital comes with less risk for it is
just for short term.
No Need for Special Accounting System: Since working capital is a short term asset that will last
for a year only, there will be no need for adoption of a special accounting system.
Sources of Working Capital
Operational funds
Sales of assets that are non-current
Long term investments sales
Physical fixed assets sales
Intangible fixed assets sales
Financing for longer term
Borrowings that are long term
Issuance of preference and equity shares
More about Working Capital
Working capital is definitely affected by various transactions on a regular basis. The mentioned
characteristics will result to financing that is limited. This is due to the fact that the client will only be
charged for the interest for just the average utilized outstanding and will be save from the trouble of
having to reinvest on surpluses that are short term that usually arise out of the use of low working capital
at a certain point in time.
ShareThis Article


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Working capital in a small business represents a companys current assets minus current liabilities. Current assets
are the resources that a company can easily convert into cash within one year. Current liabilities are the debt
obligations a company must repay within a year. Working capital measures the efficiency and short-term financial
health of a company. Small-business owners need sufficient positive working capital to operate successfully. A lack
of working capital presents many disadvantages to small businesses.
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Hard to Attract Investors
A small business that lacks sufficient working capital may find it difficult to attract investors and lenders. Working
capital shows investors and creditors that a company possesses the ability to pay back its loan or can earn a
sufficient profit that allows investors to earn a return on their investments. Some creditors may require a company to
use its assets as collateral. Creditors may view companies without working capital as a risk. The inability to attract
investors and lenders may affect a companys ability to purchase necessary resources.
Day-to-Day Operations
Working capital measures a companys ability to turn short-term assets into cash. A lack of working capital may
jeopardize a companys ability to finance its day-to-day operations. Day-to-day operations in a small business
typically include salaries, inventory purchases and equipment needs. A lack of working capital also makes it
difficult for a company to prepare for emergencies. For example, if a company loses a majority of its inventory to
unforeseen circumstances, a lack of working capital makes it difficult to replace the inventory to operate.
Related Reading: Difference Between Capital Expenditure & Net Working Capital
Difficult to Grow Business
Positive working capital allows small-business owners to grow in the future. When a company desires to grow or is
trying to meet customer demands, it often purchases additional assets needed to manufacture products or offer
services at a quicker pace and on a larger scale. A lack of working capital hinders a company from acquiring what it
needs to expand. If a company continues to experience problems with growth, it may find itself losing customers to
competitors.
Improving Working Capital
Small businesses struggling to maintain a positive working company must take steps to improve the situation to
remain viable. One way to improve the amount of working capital available is to focus on receiving cash payments.
Emphasizing cash payments may include revising your accounts receivable policies to encourage customers to pay
their invoices earlier. Although working capital includes current assets, a company may experience cash-flow
problems if assets are not converted to cash. Other methods to increase working capital include selling long-term
assets for cash or increasing sales revenues

Classification of working capitalPresentation Transcript
1. CLASSIFICATION OFWORKING CAPITAL PRESENTED BY: ALEENA CHACKOCHAN MACFAST
2. WORKING CAPITAL Working Capital refers to that part of the firmscapital, which is required for
financing short-term orcurrent assets such as cash marketable securities, debtorsand inventories.
Funds thus, invested in current assetskeep revolving fast and are constantly converted into cashand
this cash flow out again in exchange for other currentassets. Working Capital is also known as
revolving orcirculating capital or short-term capital.
3. TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF BASIS OF CONCEPT TIME
Gross Net Permanent Temporary Working Working / Fixed / Variable Capital Capital WC WC
Seasonal Special WC WC
4. GROSS WORKING CAPITAL Gross working capital require that a firm haveadequate investment in
current assets and propermanagement of theses asset. It should be neither excessive nor
inadequate asset.If there are surplus funds they should be immediatelyinvested, and if the funds
become low and therequirement is greater the financial manager should beable to get the required
finance so that the commitments ofthe firm can be made short notice.
5. CL = Accounts Payable + Notes and Bills + Outstanding Expenses + Short Term Loans. CA= cash
+ marketable securities + accounting receivables + notes and Bills Receivables + Inventories
NWC= Current Assets Current Liabilities NWC explain the management of financing of working
capital through the financing of long-term and short term funds. The current asset should as a rule
maintain a ratio of 2:1 with current liabilities. It is the difference between current asset and current
liabilities. When current asset are higher than current liability NWC will be positive, but if current
liabilities exceed current assets NWC.NET WORKING CAPITAL
6. DIFFERENCE BETWEEN NET WORKING CAPITAL AND GROSS WORKING CAPITAL Net
Working Capital Gross Working Capital1. NWC is the concept of qualitative 1. GWC is the concept of
quantitative nature. nature.2. It is indicating the firms ability to meet 2. It is pointing out the total
amount its operating expenses and current available for financing the current liability. assets.3. It
expressed as current asset minus current liability. 3. It indicating the total sum of current4. It is
concept very popular in accounting assets. system. 4. It is a concept very popular in financial5. Net
concept suitable for sole trader management. and partnership firms. 5. Gross concept suitable for
companies.6. It is very useful to find out true the financial position of a company. 6. It cannot reveal
the true financial7. Increase in bank loan cannot increase position of a company. working capital.
Retained profits, sale of 7. Every increase in borrowing will fixed assets will increase net working
increase the gross working capital. capital. Under net concept, no change in
7. Grows the size or volume of business operation. Constantly changes in the business from one
asset to another. Continue to exist for a longer period of time is the business activities.
PERMANENT OR REGULAR WORKING CAPITAL Permanent working capital is the minimum
levelof current assets which is continuously required by a firmfor carrying out its business activities
and that cannot beconverted into cash in normal course of business. Permanent working capital is
either constant or itincrease with the size of the business or its scale ofoperations.Charactertics:
8. It fluctuates according to the level of operations. It is created to meet liquidity requirements. It is
an extra working capital needed to changing production and sales activities. TEMPORARY OR
VARIABLE WORKING CAPITAL Any amount over and above the permanent level ofworking capital
is temporary working capital. It keeps onfluctuating from time to time as per the changes
inproduction and sales activities.Charactertics:
9. It is needed for shorter period.Two types of temporary working capital Seasonal working capital.
Specific working capital. Temporary working capital is fluctuating during the operating period.
10. SEASONAL WORKING CAPITAL The capital required to meet the seasonaldemands of the
enterprise is called seasonal workingcapital. For example, a manufacture of woolen
textiles,refrigerators or coolers may need extra funds to carry onproduction and to accumulate stock
before the salesoperations. Seasonal working capital being of short-termnature, it has to be financed
from short-term sources likebank loan etc.
11. SPECIFIC WORKING CAPITAL Specific working capital is that part of workingcapital which is
required to meet unforeseen contingencieslike slump, strike, flood, war etc. Additional working
capital is to be arranged tomeet special exigencies such as launching of extensivemarketing
campaign, purchase of goods for stock in viewof future increase in price etc.
12. THANK YOU