3.3 Working capital

What we will study?

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By the end of this unit you should be able to:  
  • Define working capital and explain the working capital cycle
  • Prepare a cash flow forecast from given information
  • Evaluate strategies for dealing with liquidity problems

What is working capital?

 All businesses need finance to pay for everyday expenses such as wages and the purchase of stock. Without sufficient working capital a business will be illiquid - unable to pay its immediate or short term debts. Either the business raises finance quickly, such as a bank loan, or it may be forced into liquidation by its creditors, the firms it owes money to.

What is cash flow?

Working capital = current assets - current liabilities.

Liquidity - definition: The ability of a firm to be able to pay its short-term debts.

Insolvent - definition: When a business cannot meet its short-term debts.   

The cash flow forecast