What is Working Capital? Working Capital is the funds (money) required to finance the normal day to day expenses of your business. Your working capital ensures that you are able to pay your debts as they fall due. This is particularly important during the start up period.
The working capital cycle is time between paying for the goods purchased by you and the final receipt of payment that you receive when the goods are sold. The best outcome is to keep this cycle as short as possible. A short working capital cycle increases the effectiveness of your working capital.
There are four sections that make up the working capital cycle. They are:
- Cash – funds available
- Creditors – account payable
- Inventory – stock on hand
- Debtors – accounts receivable
To be successful in cash management a business owner must be in control of each step of the cycle. If a business owner can quickly convert their trading operations into cash, they would be increasing the liquidity of their business. If the liquidity of a business is increased, it means that it will be less reliant on cash from customers, get extended terms and conditions from suppliers.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
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