Also known as 'net current assets', working capital is the total of a firm's current, or short term, balance sheet assets minus all current liabilities (often shown as 'creditors: amounts falling due within one year'). So, with stock of £2m, debtors of £2.5m, short term investments of £1.5m, cash of £1m and short-term creditors of £3m, working capital is £4m (2 + 2.5 + 1.5 + 1- 3).
Most businesses need working capital in order to trade and expand. Too much, however, can indicate inefficiencies, perhaps arising from overly generous credit terms given to customers, carrying too much stock or a lack of control over suppliers (poor 'supply-chain management'). Indeed many of the smaller, fastest growing companies that eventually go bust do because they have focused on sales growth at the expense of proper working capital management.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Inflation holds steady at 3.8% ahead of BoE meetingThe rate of inflation did not rise in August, but the Bank of England is still expected to keep interest rates on hold tomorrow
-
Thousands of savers with £250k pensions take cash over tax-free money and IHT fearsWith a record £70 billion withdrawn from pensions in the year to March, experts are concerned savers are making knee-jerk decisions without advice that could affect their long term wealth
