stellrweb-djb1whucfBY-unsplash

Working Capital: What It Is & Why It Matters

Working capital is your current assets minus current liabilities (CA – CL)

Current assets are things like: 

  • Cash in the bank
  • Accounts receivables (money that needs collecting)
  • Inventory
  • Investments

Current liabilities are things like: 

  • Accounts payable (bills you need to pay)
  • Short-term debt
  • Current portion of long-term debt 
  • Unearned revenue outstanding (similar to A/R)

Apple’s (AAPL) latest 10-K reported $163B in current assets and $106B in current liabilities. This gives us $57B in positive working capital. 

Positive & Negative Working Capital 

Working capital has two forms: positive and negative

Positive: You have excess cash to pay for the daily operations of the business (salaries, creditors, suppliers, rent, etc.).

Negative: You do not have current cash to pay for daily operations but instead use suppliers and customers to fund expenses.

The Pros & Cons of Positive & Negative Working Capital

There’s benefits and downsides to both types of capital cycles. Let’s start with positive working capital: 

Pros: 

  • You have a good cash buffer for unexpected expenses
  • Can fund growth and future opportunities with cash 

Cons: 

  • High working capital could be due to too much inventory or inability to reinvest in the business

Alright let’s shift to the negative rendition: 

Pros: 

  • Fund operations through suppliers and customers
  • Generate cash from customers before you have to pay your current liabilities
  • Ideal for businesses with high turnover in product/sales

Cons: 

  • Without growth, WC eats away at profits
  • Lose money if customers don’t pay on time (i.e., higher A/R)
  • Doesn’t look good for bank funding/liquidity 

Which Cycle Works Best?

The answer: it depends

It depends on the industry you’re in and the growth trajectory of the internal business. Companies that enjoy negative WC cycles include: Online retailers, grocery stores, restaurants and telecom companies (via financialexpress.com). 

That wraps up this week’s accounting breakdown. 

If you like this idea, let me know. If you hate it, still let me know. We’re always looking for ways to bring more value to you!

All content on our website, emails, social media posts, comments on other websites or other material generated by Macro Ops is intended for general information purposes only. None of our content should be considered to be an invitation to buy or sell securities. No content from Macro Ops should be considered individual investment advice. Macro Ops cannot guarantee accuracy of information on the site. Contributors to Macro Ops may have trading or investing positions in the securities mentioned. You should assume that we are likely to take trading positions in the stocks, options, futures or other securities we write about. Macro Ops does not have an obligation to inform readers of a change of opinion on securities mentioned or on a change in our trading positions on securities mentioned. Macro Ops assumes no liability for losses incurred from readers trading securities that are mentioned in any of our content. None of the media brands in the “Featured In” section have directly endorsed our products or services. For full disclaimer, please visit: https://macro-ops.com/terms-of-service/ Copyright © 2020 Foundation Alpha LLC. All rights reserved. - powered by Enfold WordPress Theme