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Jeffrey Veen

Investment Dictionary


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Working Capital

 

Working capital can be calculated from balance sheet data. There are few ways to calculate working capital, but the most accurate is this one (for operating working capital):

 

Working capital = total current assets – financial current assets (including cash*) – total current liabilities + financial current liabilities

* Cash also might be included in working capital, but only if it’s necessary for company’s activity, for example, company is involved in retail trading. 


Why is working capital so important for corporate finance and corporate investment? Well, it really became very important over few last decades, when working capital management theories got so popular. Working capital is important because capital costs money, directly or not. High working capital for the company means that activity is not very effective and it increases indirect costs for the shareholders

 

If you want to know whether working capital is normal at your corporation, you should calculate ‘working capital to sales‘ ratio and compare it to other companies in the same sector (activity has to be very similar).

 

Working Capital Management Techniques

I have to say that sometimes CFO’s are getting crazy about the working capital management. They try to reduce it at any costs until it becomes negative and even further. The simplest way to manage working capital is to delay the payments of your company to others and to get the payments from others much faster. It might not be worth of the prize if your reputation will suffer from that. 

 

Working capital management differs from investment management, which is oriented in long term assets. 

 

 






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