What’s the definition of working capital and how would I measure it?
Working capital is the amount of current assets you have minus current liabilities at a certain snapshot in time. It’s like the balance sheet report in that is measures something at a given moment in time instead of a change over a period of time. Working capital is a snapshot of the differences between assets and liabilities, but it’s important to say that it’s not just all assets minus all liabilities, just current assets minus current liabilities.
Work capital example
You can get these amounts from the company balance sheet. For example, if on your balance sheet you report a million dollars ($1,000,000) in current assets and five-hundred thousand dollars ($500,000) in current liabilities, the company’s working capital would be half a million dollars ($500,000).
If you have a significant amount of work in capital, you can still end up experiencing what they call a cash crunch or a shortfall if your current assets are not in cash, so if you have all of your current assets in the form of accounts receivable, then those payments will need to be collected. Another example would be if you had all of your assets in the form of buildings, then you know, you might have a situation where if you don’t have employees or you have too many you know, you have too many buildings and not enough services being provided then you might want to think about selling some of your buildings and downsizing you know, the physical building footprint of your business. So you can have a lot of work in capital and still not be able to make payroll.
There’s a couple of other related topics that are also related to work in capital. One of them is current ratio, a quick ratio, accounts receivables turnover ratio, and also day sales in accounts receivable inventory turnover ratio, and day sales in inventory. So you want to monitor your current assets on a regular basis and make sure that your cash flow is good. If you do that all the time then your financial issues will be better and you will not have upset employees.