How to Define Working Capital
Here we will focus on the conversion of raw materials into finished goods, also known as working capital. Working capital also refers to the amount of day-to-day operating liquidity. Companies are short of working capital if their assets cannot be promptly converted into cash. A company with good working capital will have increased assets over liabilities. The information below will be useful to anyone doing research on a business, selling their business or looking to purchase a company.
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Instructions
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Define working capital by the company's cash flow statement and its supply chain. You'll need to have access to the company’s cash flow form, and you will need to look at the liabilities and assets on the company’s financial statement. Locate the liabilities/assets section of the financial statement. If the liabilities exceed the assets, you might have a problem in supply chain management. Companies try to control the production or link to the production in order to cut exceeding costs. You’ll also need to ensure that your cash flow is more than what you’re paying for your products.
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Investigate your supply chain management thoroughly. Call a meeting and ask questions. Is your company in control of the product supply chain? How is your product produced, shipped and distributed? The faster you can supply your products to the customer and make payments on time to suppliers, the better your working capital will be.
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Investigate the length of the cash cycle. Divide your receivables by your company’s total credit sales (or annual sales) and multiply by the number of days. This will give you your company’s Days-Sales Outstanding (DSO). A high DSO is bad because it means your company is not likely to meet short term obligations. Your company needs to collect payments for services on time; just as your suppliers need you to pay them on time. Thoroughly investigate supply chain management.
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