Articles Blog
Business Financials – What is Working Capital
- Details
-
Published on Friday, 02 October 2020 08:52
Working capital is the difference between current assets (CA) and current liabilities (CL) at a specific date.
The CA and CL amounts are found on your company's balance sheet.
For example, if your company's balance sheet has current assets of $50,000 and current liabilities of $30,000 then your company's working capital is $20,000.
Working Capital = Current Assets – Current Liabilities
In a healthy business, ideally, we want Assets (that is, ones that can be turned into cash within 12 months, such as Cash, Inventory, Debtors who owe the company etc) (ie “Current” means within 12 months) to be GREATER than Current (12 months) Liabilities.
BUT NOTE - Even with a significant amount of working capital, a company can still have a period of cash shortage if its current assets are not turning to cash. As an example, a company with most of its current assets locked up in inventory. Or if a company has a large accounts receivables that are not being collected, but even still, this large working capital situation isn't much immediate help when you can't meet the payroll run!
There are also other financial ratios use the working capital components such as the current ratio, quick ratio, accounts receivable turnover ratio, and inventory turnover ratio.
Good management means keeping watch on key current assets (receivables and inventory) to keep the cash coming into the bank!
Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much!
Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!
Email
This email address is being protected from spambots. You need JavaScript enabled to view it.
or call 0407 361 596 Australia
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
