Ten reasons working capital requirements can increase

December 6, 2015

Working capital plays in important role in a company.†In this article, we will take a look at ten reasons working capital requirements can increase and how to better manage working capital.

1. Components of working capital

Working capital is like a blood system of a business.† It helps a company to operate and maintain its course.† Poor working capital may result in operational disruptions.† Therefore, paying attention to working capital is an integral part of running any business.† Typically, accounting or finance personnel prepare working capital calculations.

Letís take a look at what working capital is composed of:

Working Capital

=

Receivables + Inventory - Payables

Receivables (or accounts receivable) are the amounts of probable future cash receipts that are due from customers (i.e., amounts to be collected in the future).

Inventory is a current asset on an entity's balance sheet. Inventory includes goods for resale, raw materials, and spare parts.

Payables (or accounts payable) represent amounts that an entity owes to its suppliers (vendors) for goods purchased or services received on credit.

As can be seen from the formula above, receivables and inventory increase the working capital requirements and accounts payable decrease them.

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