Working Capital Calculation

May 19th, 2015
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Aberystwyth University
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Accounts payable Accruals of wages and salaries All payments on long-term debt that are payable within a year

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Working CapitalShort-Term FinanceWhat Is (Net) Working Capital? Current Assets Current LiabilitiesFall 2005Dr. Tuftes FIN 4250 Notes2What Does It Mean to be Current? Convertible to cash with a yearFall 2005Dr. Tuftes FIN 4250 Notes3What Are Current Assets? Cash Very liquid short-term securities - like T-bills,repurchase agreements, and commercial paper are usually included here Marketable securities Less liquid and longer-term investments madeout of current assets Inventory Accounts receivableFall 2005Dr. Tuftes FIN 4250 Notes4What Are Current Liabilities? Accounts payable Accruals of wages and salaries All payments on long-term debt that arepayable within a yearFall 2005Dr. Tuftes FIN 4250 Notes5What Is Non-Cash WorkingCapital? Remove cash and marketable securities fromcurrent assets Cash and marketable securities are held for reasonsbeyond just working capita They also pay interest, reducing their opportunity costto something much closer to zero than canreasonably be expected from non-cash workingcapital Remove debt as well it gets counted in cost ofcapital Inventory+receivables-payables-accrualsFall 2005Dr. Tuftes FIN 4250 Notes6What Is the Pitfall in Thinking AboutNon-Cash Working Capital? Increases in inventory and receivablesbleed cash out of the firm Increases in payables and accruals yieldcash for the firmF

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