Working capital

(noun)

The total available cash and cash equivalents after subtracting current liabilities from current assets.

Related Terms

  • static
  • service industry

Examples of Working capital in the following topics:

  • Long-Term Approach

    • Recognize the broader objectives of working capital, as well as how organizations can consider a long-term perspective when viewing the utilization of working capital.
    • This free working capital can be utilized in a variety of ways.
    • From a longer-term perspective, working capital profitability decisions revolve around how much should be available within any short-term time frame in order to maximize the return (on average) of existing working capital.
    • By looking at differences in working capital availability over a long period of historical data, the organization can make rough estimations of the optimal amount of working capital availability that allows optimal growth.
    • Identify the primary objectives of working capital, and how a longer-term perspective can offer insights
  • Calculating Expected Value

    • Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.
    • Net working capital is calculated as current assets minus current liabilities.
    • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a "working capital deficit. "
    • We can find working capital by:
    • The common commercial definition of working capital for the purpose of a working capital adjustment in a mergers and acquisitions transaction (i.e., for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:
  • Decision Criteria

    • The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
    • Working capital is the amount of capital which is readily available to an organization.
    • 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.
    • Another factor affecting working capital management is credit policy of the firm.
    • Cash conversion cycle is a main criteria for working capital management.
  • Working Capital

    • Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
    • Net working capital is calculated as current assets minus current liabilities.
    • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
    • Decisions relating to working capital and short-term financing are referred to as working capital management.
    • The management of working capital involves managing inventories, accounts receivable and payable, and cash.
  • Understanding the Needs of the Business

    • Working capital is considered a part of operating capital along with fixed assets, such as plant and equipment.
    • However, too much working capital can carry with it a higher cost of capital.
    • When calculating working capital, we think in terms of net working capital, which is calculated as current assets minus current liabilities.
    • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
    • Describe the goals of a business in the context of ts working capital needs
  • Short-Term Approach

    • Decisions relating to working capital are usually short-term, since it is the difference between current assets and current liabilities.
    • Working capital is the amount of capital that is readily available to an organization.
    • As a result, the decisions relating to working capital are almost always current, i.e., short term, decisions.
    • In other words, working capital management differs from capital investment decisions - specifically in terms of discounting and profitability.
    • Working capital management applies different criteria in decision making.
  • Calculating Working Capital

    • Working capital (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.
  • Evaluating Interest Rates

    • The management of working capital takes place in the realm of short-term decision-making.
    • The interest rate most commonly used in working capital management is the cost of capital.
    • 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 mentioned, working capital decisions are made with the short-term in mind.
    • Interest rates of working capital financing can be largely affected by discount rate, WACC and cost of capital.
  • Choosing a Policy

    • A firm will use a combination of policies for managing working capital, focusing on cash flow, liquidity, profitability, and capital return.
    • Guided by criteria measuring cash flow, liquidity, profitability, and return on capital, the management of a firm will use a combination of policies and techniques for the management of working capital.
    • A final area management should be concerned with when deciding on a working capital policy is short-term financing.
    • If the maturity of liabilities is longer than the life expectancy of assets, then there should be sufficient working capital available to pay off debts.
    • This chart lays out sample working capital issues and some possible solutions.
  • Free Cash Flow

    • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
    • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
    • Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
    • Cash flows from operations = Earnings before Interest and Tax x (1-Tax rate) + Depreciation & Amortization - Changes in Working Capital
    • The second difference is that the free cash flow measurement deducts increases in net working capital, where the net income approach does not.
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