FIN 500 Mod08 P2 Working Capital Video Definition

♪ Music in background ♪ ♪ Music in background ♪ Working Capital ♪ Music in background ♪ What is it Working capital is money available to a company for day to day operations. ♪ Music in background ♪ [Text on screen: How it works] The formula for working capital is current assets minus current liabilities. Let's take a look at a balance sheet for company XYZ. In order to calculate total current assets you must first calculate the total amount of cash, marketable securities, accounts receivable, and inventory you currently have. In order to calculate Total Current Liabilities you must calculate the total amount of accounts payable, accrued expenses, notes payable, and current portion long term debt. Using the working capital formula and the information from the balance sheet of the company XYZ, we can calculate that XYZ company's working capital is $95,000 dollars. ♪ Music in background ♪ [Text on screen: Why It Matters] Working capital is a common measure of a company's liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short term accounts, a company's working capital reflects the results of a host have company activities including inventory management, debt management, revenue collection, and payments to suppliers. Positive working capital generally indicates that a company is able to pay off its short term liabilities almost immediately. While negative working capital generally indicates a company is unable to do so. One of the most significant uses of working capital is inventory: the longer inventory sits on the shelf or in the warehouse the longer the company's working capital is tied up. When not managed carefully, working capital shortages cause many businesses to fail even though they might actually turn a profit. Working capital needs to vary from industry to industry, especially considering how different industries depend on expensive equipment, use different revenue accounting methods, and approach other industry-specific matters. Finding ways to keep working capital stable is particularly difficult for manufacturers, and other companies that require a lot of up front cost. For these reasons' comparison of working capital is generally most meaningful among companies within the same industry and the definition of a high or low ratio should be made within this context. [Text on screen: InvestingAnswers]