Working Capital

Principle

• working capital = current assets - current liabilities
• working capital → money which is not resulting in long-term profits
  • current assets are used to build and sustain revenue
  • long term profits come from non-current assets
    • e.g. new machines → cheaper production → larger margin

Too High Working Capital

• might be too much Inventory → hard to sell
• many firms are trying to reduce their working capital

Working Capital Cycle

Transclude of Production_Cycle.excalidraw

Balance Sheet and P/L

• Buy Resources (+20 inventory, +20 liabilities)
  • work-in-progress and finished goods
• Produce Products (+15 inventory, -15 cash)
• Sales → Receivables (+50 receivables, -35 inventory, +15 retained earnings)
  • P/L (Sales +50, Cost of Goods Sold -35 = 15 Profit)
• Receivables → Cash Flow (+50 cash, -50 receivables) (P/L 0)
• Cash Flow → paying Payables (-20 cash, -20 liabilities)
• Produce or Buy Inventory → circle continues

Same with Cash Flow

• start with EBT: +15
• • increase in inventory: -20
• • increase in liabilities: +20
• • spending in production: -15 ← actual cash flow
• • reduction in inventory: +35
• • increase in receivables: -50
• until here sum is 0 → no cash has flown yet
• • decrease in receivables: +50 ← actual cash flow
• • decrease in liability: -20 ← actual cash flow
• = +15 → positive cash flow