working capital

= working assets

The capital that is used to finance the day-to-day operations of a company. Working capital is part of the balance sheet and is calculated as the difference between current assets and current liabilities.

The size and composition of working capital will vary between different types of business. For example, at any given moment a manufacturing company needs to hold raw materials, work in progress, and finished goods. Typically, manufacturing companies sell goods on credit, thereby generating accounts receivable. A supermarket has very different working capital requirements as it only needs to hold finished goods and will sell goods for cash. For a typical supermarket, the accounts receivable in the balance sheet will be much higher than stocks held. This is good for the supermarket, as it can get the cash from its customers before it has to pay suppliers. By contrast, a manufacturing business may have to pay suppliers many months before it is able to get cash from its customers.

Working capital is an investment in short-term assets and as such its management is very important to a business. Holding sufficient levels of finished goods to meet customer requirements is important, but managers should also be aware of the cost of holding these goods.