5.2.1 Working capital

Working capital, also known as net current assets, is the difference between a company’s current assets and current liabilities. It is required by all companies to finance day-to-day trading activities and can be calculated as follows:

The amount of working capital is a measure of a firm’s ability to meet its short-term obligations and to complete the normal cycle of profitable operations. For a retailer, for example, it would buy goods and then sell them later in order to generate profits and then reinvest the profits back into the operations of the firm in a continual cycle. Without working capital a firm is not able to grow. The three main elements of working capital are trade receivables, trade payables and inventory.

Working capital for Remote Sensors Plc is calculated below.

A company can hold a sufficient level of inventories, allow sales on credit terms and make timely payments to its suppliers only if it has adequate working capital to finance these activities. However, the amount of working capital required will vary from business to business depending on the nature and size of the business.