Talk:Working capital

Pontification

... Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory).

The article currently says "Any changes in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business's cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future of the company."

I think the positive/negative are switched around here. A "positive change in working capital" would mean working capital has increased, and thus the business has received cash, or converted inventory to cash. An increase in working capital would not have a negative impact on the business's cash holdings. An increase in working capital would mean that current assets have increased with regard to current liabilities. This is a good thing. I'm going to edit this.DanIzzo 21:53, 3 April 2007 (UTC) bothered, i dont care.

If a company pays down liabilities using cash, (Dr. AP / Cr. Cash) this transactions has a net effect of zero on working capital. The lower liability increases working capital, while the lower cash lowers working capital.

Depending on the circumstance, I disagree with the above statement about the pay down of A/P. Most valuations textbooks define working capital as operating current assets minus non-interest-bearing current liabilities, which is a more granular (and more correct) definition than current assets minus current liabilities. Any excess cash is considered to be a non-operating current assets and is netted against debt. If the minimum amount of cash needed to operate the business is not affected by a pay down of A/P, then the cash used in the pay down will come from excess cash (i.e., non-operating current assets). In this case, working capital would increase by the same amount that A/P decreased. Net debt and total invested capital would also increase by the same amount. —Preceding unsigned comment added by 144.9.8.21 (talk) 22:24, 13 September 2007 (UTC)

This might help. The textbook Short-Term Financial Management by Maness and Zietlow have the best explanation I've seen:
Net Working Capital(NWC) = Working Capital Requirments (WCR) + Net Liquid Balance (NLB)
WCR = A/R + Inventory + Prepaids & other Current Assets – Accounts Payable – Accruals & other Current liabilities
NLB = Cash + Marketable securities – Notes Payable – Current Maturities
Other textbooks seem to want to change the meaning of NWC (working capital) but this textbook decided to settle the argument and distinguish NWC from WCR and from NLB. I'll let you guys decided on how to address this on the page but i do think this is the solution to the disagreement.(207.172.218.46 21:44, 1 December 2007 (UTC))

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BetacommandBot 11:37, 6 July 2007 (UTC)

In the case of excess cash, all of my MBA textbooks on valuation recommend excluding it when calculating working capital. The excess portion is instead netted against debt, hence the term "net debt." Otherwise, reducing receivables or inventory wouldn't affect free cash flow and, therefore, wouldn't change the value of a company. This obviously can't be the case. Many entry-level finance texts shorten the definition to current assets minus current liabilities for the sake of introducing the concept to the reader, but the simplification isn't entirely correct. The article as it stands today mentions including debt payment due within 12 months. I'm not for sure that this is always the case. There is no hard, steadfast definition for many financial terms, so inclusion of the current portion of long-term debt depends on the context in which the calculation takes place.

Graphic Domestic credit to private sector in 2005 I don't really understand why this graphic has such a dominant place in the article. —Preceding unsigned comment added by 218.214.74.247 (talk) 03:49, 17 April 2008 (UTC)

Working Capital

working capital issues are the most improtant in investment decission making process. Working Capital means Current Assets - Current Liabilities but there are accounts payable (current liabilities and (accounts receiveables) current assets and (Inventories) current assets so these three points should be in mind. There are two ways to think either the organization or compnay is with positive working capital or negetive working capital. If the assets are enough and convertable in liquired form this is positive sign for working capital and company strengh otehrwise if the assets are enough but not in liquid form and nor easily convertiable into cash this is negetive sign for any compnay or organization. So one of the 3 are inventories as inventories are the part of current assets. (m.saghir) —Preceding unsigned comment added by 203.99.179.21 (talk) 07:23, 13 October 2010 (UTC)

What is this?

${\mbox{Net Working Capital}}={\mbox{Current Assets}}-{\mbox{Current Liabilities}}$

${\mbox{Net Operating Working Capital}}={\mbox{Current Assets}}-{\mbox{Non Interest-bearing Current Liabilities}}$

${\mbox{Equity Working Capital}}={\mbox{Current Assets}}-{\mbox{Current Liabilities}}-{\mbox{Long-term Debt}}$

I have no clue. I removed it from the lead and couldn't find a better place for it. Someone want to deal with it?The Sound and the Fury (talk) 05:20, 31 December 2011 (UTC)

Sounds like personal opinion

Section: Working capital cycle / Meaning

It is just my opinion (I have no expertise on the actual topic), but the wording in these paragraphs makes it sound like the contributor is giving a personal opinion about the topic; whereas the contributor is actually trying to give an alternative and valid viewpoint that should be considered when the reader is researching the topic. (note also that the original text looks like it has been lifted straight off the source website)

As an absolute rule of funders, each of them wants to see a positive working capital. Such situation gives them the possibility to think that your company has more than enough current assets to cover financial obligations. Though, the same can’t be said about the negative working capital. A large number of funders believe that businesses can’t be sustainable with a negative working capital, which is a wrong way of thinking. In order to run a sustainable business with a negative working capital it’s essential to understand some key components.

1. Approach your suppliers and persuade them to let you purchase the inventory on 1-2 month credit terms, but keep in mind that you must sell the purchased goods, to consumers, for money.
2. Effectively monitor your inventory management, make sure that it’s often refilled and with the help of your supplier, back up your warehouse.

Plus, big companies like McDonald’s, Amazon, Dell, General Electric and Wal-Mart are using negative working capital.

Can I suggest the following revision:

Investors and creditors generally view positive working capital as an indication that a business has enough current assets to cover financial obligations, whilst a negative working capital indicates that a business cannot support its working debts.

An alternative view is that negative working capital can be managed in such a way that the business can be sustained. Companies that successfully use this strategy include McDonald’s, Amazon, Dell, General Electric and Wal-Mart. The characteristics of companies that operate in this way are:

1. Long (1-2 month) credit terms from suppliers for inventory
2. Cash or up-front payments from consumers purchasing inventory
3. Effective inventory management, to ensure that demand does not outstrip supply

TonkaToys (talk) 10:37, 14 March 2016 (UTC)

References