Cash-Flow Forecasting And Working Capital: Working Capital (Copy)
Cheat Sheet: 5.2.2 Working Capital
Concept of Working Capital
| Term | Definition | Formula | Example |
|---|---|---|---|
| Working Capital (WC) | The funds available to a business for day-to-day operations | WC = Current Assets – Current Liabilities | CA = $50,000, CL = $30,000 → WC = $20,000 |
| Current Assets (CA) | Cash, inventories, receivables | Cash $10,000 + Stock $20,000 | |
| Current Liabilities (CL) | Debts due within a year (overdrafts, creditors) | Suppliers owed $15,000 |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Importance of Working Capital
| Aspect | Explanation | Example |
|---|---|---|
| Liquidity | Ensures ability to pay short-term debts | Paying supplier bills on time |
| Smooth Operations | Covers wages, stock purchases | Retailer buying weekly inventory |
| Survival | Prevents insolvency despite profits | Shop with high sales but no cash to pay rent |
| Flexibility | Allows responding to opportunities | Buying raw materials in bulk discounts |
Types of Working Capital
| Type | Meaning | Example |
|---|---|---|
| Positive WC | CA > CL → safe liquidity | CA $40,000 > CL $25,000 |
| Negative WC | CA < CL → risk of insolvency | CA $20,000 < CL $35,000 |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Quick Revision Bullets
- Working Capital = CA – CL
- Positive WC = good liquidity → safer business
- Negative WC = risky, may lead to failure
- Important for paying bills, wages, suppliers, and ensuring smooth operations
- Profitable firms can still fail if WC is too low
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course