These are five of the top index funds to consider adding to your portfolio this year.
What is working capital?
Working capital is the sum of the cash and highly liquid investments that a business has on hand to pay for day-to-day operations. Technically speaking, working capital is equal to the total of a company’s current assets minus its total current liabilities.
If a firm has positive working capital, that means it has enough current assets to cover short-term debt. Current assets include cash and assets that can be turned into cash within one year, whereas current liabilities are debts due within one year of the date of the financial statement. If current liabilities exceed current assets, a company has a working-capital deficiency or a working-capital deficit.
Working-capital management refers to business decisions governing a firm’s current assets and short-term liabilities. The goal is to prevent deficits and ensure the firm maintains the right amount of cash flow to satisfy both maturing short-term debt and its operational expenses.
Understanding the balance of short-term liabilities and current assets is aided by the quick ratio and the current ratio. In addition, the working capital turnover ratio measures how well a company supports sales given their total working-capital level. With all three ratios, lower figures indicate trouble with working capital and liquidity, while higher ratios indicate that a company has high liquidity and efficiently manages its cash — or may need to think about returning more money to its investors.
Interested in increasing your working capital? Bankrate’s investments calculator can help you make sound financial moves.
Working capital example
Managers strive to balance incoming and outgoing payments in order to minimize net working capital and maximize free cash flow. Sports Management International (SMI) pays its athlete clients sooner than it collects on receivables from major sports franchises and needs a credit line to finance operations. Because it is a growing business, SMI is trying to shorten its working capital cycle and limit the interest expenses it faces from short-term financing.