Working Capital

Working Capital

1. lifeblood of a business

   • working capital = current assets - current liabilities

2. How much is needed?

   • Sufficient needed to prevent a business from becoming illiquid + unable to pay its debt
     • too high a level of WC = disadvantage
       • too much capital tied up in stocks, debtors + idle cash = the return that money could earn elsewhere
     • working capital cycle
       • the period of time between spending cash on the production process & receiving cash payments from customers
         • the longer this time period (from buying materials + receiving payment) = the greater the working capital needs

3. Cash vs. Profit

   • Profit does not pay the bills - cash does
     • common for profitable businesses to run short of cash
   • Cash flow
     • relates to the timing of payments to workers and suppliers + receipts from customers
       • the sum of cash payments made to a business (inflows) - the sum of cash payments made by it (outflows)