One of my module lecturers happen to come from corporate banking background which involves a lot of credit and loan approvals for companies. She recently shared her take on working capital which I thought is worth sharing because it contradicts with conventional wisdom. It will be interesting to hear what others think of it.
What is working capital?
Working capital is a financial metric which represent operating liquidity available to a business. It is calculated as current assets minus current liabilities. Liquidity management is a vital aspect of a company – the conventional wisdom is that a positive working capital means sufficient liquid assets are able to be converted to cover short term funding requirements (current liabilities), serving as a positive indicator of strong liquidity.
While current assets and current liabilities include a wide range of accounts depending on the nature of the business, accounts receivable, inventory and accounts payable ......