Working Capital

Description of Working Capital. Explanation.

Definition Working Capital. Description.

Working Capital is the amount by which current assets exceed current liabilities. It is used to fund the operations of the company, such as purchases of raw materials, office supplies, salaries, etc. More specifically it finances the cash conversion cycle of a business: the number of days required to convert raw materials into finished goods, finished goods into sales, and accounts receivables into cash.

The amount of working capital needed varies with a number of factors, including: type of industry, efficiency of production processes, economies of scale, seasonality, sales success, etc. A (temporary) shortage in the working capital can easily lead to bankruptcy of a small firm, even if it has many profitable orders coming.

Internal sources include: retained earnings, savings through achieving operating efficiencies, allocation of cash through depreciation, deferred taxes.

External sources include: short-term borrowings, trade credit, accounts receivables factoring.

Compare with: Current Ratio  |  Working Capital Ratio  |  EBITDA  |  Cash Value Added  |  Return On Net Assets  |  Just In Time  |  Accounts Receivables Factoring  |  Recapitalization  |  Undercapitalization  |  3rd Party Logistics (3PL)  |  Sale and Leaseback

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing  |  Knowledge & Intangibles  |  Strategy  |  Supply Chain & Quality

More on Management  |  Return to Management Dictionary  | 

End of description Working Capital. An explanation.