Working.apital abbreviated AC is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental http://www.seattletimes.com/business/save-for-retirement-or-pay-off-student-loans-finding-the-right-balance/ entity. The working capital cycle FCC is the amount of time it takes to turn the net current assets and current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital or vice versa; see Discounts and allowances . Use working capital in a sentence “ Purchasing the nuclear targeting array depleted almost all Acme's working capital, but the investment paid for itself in just a few weeks. ” Was this Helpful? Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. This usually occurs when a company has used cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses. The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed ; return on equity ROE shows this result for the firm's shareholders. As a management tool, this metric makes explicit the interrelatedness of decisions relating to inventories, accounts receivable and payable, and cash.
Using the working capital formula and the information above from Figure 1, we can calculate that XYZ Company's working capital is: InvestingAnswers Feature: Financial Statement Analysis For Beginners Working capital is a common measure of a company's liquidity, efficiency, and overall health. Working capital abbreviated AC is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Current liabilities are any obligations due within one year. Current Assets - Current Liabilities = Working Capital Negative Working Capital Can Be a Good Thing for High Turn Businesses Companies that have high inventory turns and do business on a cash basis such as a grocery store need very little working capital. See economic value added EGA.