Be careful of accounting definitions

• The accounting definition of working capital = current assets – current liabilities.
• On the surface this has very little meaning.
• Current assets & liabilities could contain items that is not related to operations.
• Know your numbers so you know your business

Working capital: Internal Vs External

• Working capital is used to evaluate the efficiency of cash management in meeting the demands of the direct cost of goods/ services.
• The more certain we are, the less working capital we need.
• The more uncertain the more you need on hand
• If you half operating cycle, you half working capital need

Summary

• The whole point of WC management is to determine whether the company has enough cash to pay off short term operating liabilities as they come due.
• Bad working capital management further reduces profitability due to limited cash for further investment
• The goal is optimization and not maximization

Download the excel template in the video here: Profitability Vs Liquidity.xlsx