Working Capital

0
135
Dawn Loeffler, BA (Hons), CPA, CA Staff Accountant, Gilmour Knotts
Dawn Loeffler, BA (Hons), CPA, CA Staff Accountant, Gilmour Knotts
Dawn Loeffler, BA (Hons), CPA, CA
Staff Accountant, Gilmour Knotts

Tax Question:

What is Working Capital?

Facts:

Working Capital is the measure of operating liquidity of a company. It is calculated as current assets less current liabilities.

Discussion:

Working Capital reflects the company’s overall financial health. Working Capital includes cash, accounts receivable, inventory and any other current assets less all amounts owing within one year. Therefore, it measures if a company has sufficient assets that can be readily liquidated to pay its short-term debts.

If Company ABC has the following balances:

Cash $50,000 Accounts Payable $30,000
Accounts Receivable $10,000 Payroll liabilities $15,000
Inventory $30,000 Sales taxes payable $5,000
———- ———-
Current Assets $90,000 Current Liabilities $50,000

Working Capital is calculated as Current Assets less Current Liabilities: $90,000-$50,000 = $40,000.

Banks commonly use Working Capital and other ratios (such as current ratio, inventory turnover and accounts receivable turnover) to help determine if a company is a solid investment. If a company has negative Working Capital, it is unable to pay its current debts and may be an indication that the company is over leveraged.

One way to help manage Working Capital is to manage inventory effectively. When inventory sits for a long time in the warehouse before being sold, Working Capital is being tied up.

Another way to help manage Working Capital is to purchase costly fixed assets such as equipment through long-term financing rather than short-term debt so that Working Capital resources remain available for day to day operations.

Dawn Loeffler, BA (Hons), CPA, CA
Manager, Gilmour Group CPA’s
Email: faqs@gilmour.ca
Disclaimer: The information contained in this article is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. While we have made every attempt to ensure the information contained in this article has been obtained from reliable sources and accurately described herein. SW Media Group and Gilmour Group Incorporated is not responsible for any errors or omissions, or for the results obtained from the use of this information. Before taking any action that might affect your personal and business finances, you should consult a qualified professional advisor.