17. What is Working Capital?

SUMMARY

Working Capital! You will go broke without it!

What is working capital? Why is it important? How do you manage it?

This is the first of three videos on working capital.

What is Working Capital?

It is a theoretical measure. Often overlooked or misunderstood by managers. However, it is important to understand and manage for cash flow.

Transcription

Hi, this is Scott from Beyond the Numbers, and today we're gonna be speaking on working capital and its impact.

What is working capital? 

Working capital is a theoretical measure of what is the available liquidity of a business? What that really means is how much cash is available to be able to pay for its bills? So whether it can keep its operations going.

How do you measure working capital? 

So it's the current assets minus the current liabilities. And when we're talking about current assets, the major ones we're talking about is the bank, is the accounts receivable, and the stock. There are a few other things in there, but they're little items and they're not really gonna go towards the working capital. Current liabilities, we have accounts payable and then also tax liability. So the whole premise around working capital is that once you got your cash in your bank, you sell all of your stock, and then also you get all of your receivables in, and then you pay off your bills and you pay for your tax and then how much money you have left over after that.

So as we can see, you can either have a positive or a negative working capital. Obviously, you want to have a positive working capital so that you don't run out of cash if something comes up. If you have a negative working capital, then you know it's, then you have a problem and you need to start working on your issue. In the next section, I'm just gonna talk about why it's important to measure working capital.

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