Working Capital
Working capital is the part of the current assets financed by long-term liabilities or equity. To finance assets with equity is associated with a cost in the form of dividends to the shareholders while long-term liabilities carry interest expense.
Both inventories and receivables are assets that the company intends to turnover (convert to cash) as quickly as possible. Cash on the other hand is useful in many ways; therefore, cash is excluded when you look at working capital. The target is to minimize the working capital as much as possible without disturbing the operations.
Working capital should be as small as possible, even negative, as it contributes to the overall financial health and resilience of a business, allowing it to navigate challenges, capitalize on opportunities, and maintain smooth operations. This applies for all industries regardless of what their current assets consist of. Use the sliders to illustrate a negative working capital.
