LOPEZ, ELLA MARIE P.

FIN194
Midterm Seatwork 1

What is Working Capital?

When does a company get its working capital back?
We often wonder if what’s the purpose of a working capital and its importance. We
may not talk about working capital every day, but according to the Bank of America, this
accounting term may hold the key to your company’s success. Working capital affects
many aspects of your business, from paying your employees and vendors to keeping the
lights on and planning for sustainable long-term growth. In short, working capital is the
money available to meet your current, short-term obligations. This made me realize that
being knowledgeable about working capital creates a vital effect to the growth of a
company, because how can you manage your organizations finances if you’re lacking with
the substantial data. You can get a sense of where you stand right now by determining your
working capital ratio, a measurement of your company’s short-term financial health. With
the working capital formula: Current assets / Current liabilities = Working capital ratio.
Additionally, the net working capital can show how much money you have readily available
to meet current expenses with this net working capital formula: Current assets – Current
liabilities = Net working capital. To determine when a company get its working capital back,
we must first understand the cycle of working capital. The formula for the working capital
cycle is: Inventory days + Receivable days – Payable days =Working capital cycle. In the
first step of the process, the company gets the materials it needs to produce inventory but
doesn’t initially have any cash expense (purchased on credit under accounts payable). In
90 days’, time, it will have to pay for those materials. Eighty-five (85) days after buying the
materials, the finished goods are sold, but the company doesn’t receive cash for them
immediately, as they are sold on credit (recorded under accounts receivable). Twenty (20)
days after selling the goods, the company receives cash, and the working capital cycle is
complete.