Operarting cycle of a company Working capitalismoneyavailable to a company for day-to-day operations.The formula for working capital is:Current Assets-Current LiabilitiesHow it works/Example:Here is somebalance sheetinformation about XYZ Company:

Using the working capital formula and the information above from Figure 1, we can calculate that XYZ Company's working capital is:$160,000 - $65,000 = $95,000Working capitalis a common measure of a company'sliquidity, efficiency, and overall health. Because it includescash,inventory,accounts receivable,accounts payable, the portion ofdebtdue within oneyear, and other short-term accounts, a company's working capital reflects the results of a host of company activities, includinginventory management, debt management,revenuecollection, andpayments to suppliers.

Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. Negative working capital generally indicates a company is unable to do so. This is why analysts are sensitive to decreases in working capital; they suggest a company is becoming overleveraged, is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly. Increases in working capital, on the other hand, suggest the opposite. There are several ways to evaluate a company's working capital further, including calculating the inventory-turnover ratio, the receivables ratio, days payable, the current ratio, and the quick ratio. One of the most significant uses of working capital is inventory. The longer inventory sits on the shelf or in the warehouse, the longer the company's working capital is tied up.The definition of working capital on InvestingAnswers When not managed carefully, businesses can grow themselves out of cash by needing more working capital to fulfill expansion plans than they can generate in their current state. This usually occurs when a company has used cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses. As a result, working capital shortages cause many businesses to fail even though they may actually turn a profit. The most efficient companies invest wisely to avoid these situations. Analysts commonly point out that the level and timing of a company's cash flows are what really determine whether a company is able to pay its liabilities when due. The working-capital formula assumes that a company really would liquidate its current assets to pay current liabilities, which is not always realistic considering some cash is always needed to meet payroll obligations and maintain operations. Further, the working-capital formula assumes that accounts receivable are readily available for collection, which may not be the case for many companies. It is also important to understand that the timing of asset purchases, payment and collection policies, the likelihood that a company will write off some past-due receivables, and even capital-raising efforts can generate different working capital needs for similar companies. Equally important is that working capital needs vary from industry to industry, especially considering how different industries depend on expensive equipment, use different revenue accounting methods, and approach other industry-specific matters. Finding ways to smooth out cash payments in order to keep working capital stable is particularly difficult for manufacturers and other companies that require a lot of up-front costs. For these reasons, comparison of working capital is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

Working capital cycleDefinitionThe working capital cycle (WCC) is the amount of time it takes to turn the net current assets and current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. Therefore, companies strive to reduce their working capital cycle by collecting receivables quicker or sometimes stretching accounts payable.

MeaningA positive working capital cycle balances incoming and outgoing payments to minimize net working capital and maximize free cash flow. For example, a company that pays its suppliers in 30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days. This 30 day cycle usually needs to be funded through a bank operating line, and the interest on this financing is a carrying cost that reduces the company's profitability. Growing businesses require cash, and being able to free up cash by shortening the working capital cycle is the most inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle because it provides them with an idea of the management's effectiveness at managing their balance sheet and generating free cash flow.Objective 1 To study the implementation of working capital. Nature of Working CapitaWorking capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them.Current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. Examples- cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or the earnings of the concern. Examples- accounts payable, bills payable, bank overdraft and outstanding expenses. Objective of Working Capital ManagementThe goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained.The interaction between current assets and current liabilities is, therefore the main theme of the theory of the working capital management.Determining Financing-mix There are two sources from which funds can be raised for current assets financing-o Short term sources, like current liabilities and,o long term sources, such as share capital, long term borrowings, internally generated resources like retained earnings, etc.

Determinants of Working capital Requirement1. General nature of business,2. Production cycle,Business 3. cycle fluctuations,Production policy4. Credit policy,5. Growth and expansion,6. Profit level,7. Level of taxes8. Dividend policy9. Depreciation policy10. Price level changes Operating efficiency