working capital

Finance

(noun)

A financial metric that is a measure of current assets of a business that exceeds its liabilities and can be applied to its operation.

Related Terms

  • operating liquidity
  • liquidity
Accounting

(noun)

A financial metric that is a measure of the current assets of a business that exceeds its liabilities and can be applied to its operation.

Related Terms

  • equity
  • liquidity

Examples of working capital in the following topics:

  • Working Capital Management Analysis

    • Along with fixed assets, such as property, 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.
    • Identify working capital and discuss how a company would use it
  • 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.
  • Capital Letters

    • Proper nouns should always be capitalized.
    • A name or nickname should always be capitalized.
    • Names referring to a person’s culture should be capitalized.
    • Languages are also capitalized.
    • In titled works (such as books, articles, or artwork) the majority of the words are capitalized.
  • Defining Capital

    • In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services.
    • Physical Capital: capital that must be produced by human labor before it can become a factor of production (also referred to as manufactured capital).
    • Fundamentally, capital is any product that is produced and has the ability to enhance a person's power to perform work that is economically useful.
    • Interest allows capital to be obtained, while profit is the accumulation of the capital.
    • Social Capital is capital that is captured as goodwill or brand value.
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