Can anyone give me some help in the calculation of change of working capital ? I find I always got stuck when i face that.
Look at the changes in the B/S year over year, the 4 main items are inventory and A/R for assets and A/P and accrued taxes and expenses for liabilities. Increases in the assets are a WCInv outflow and increases in the liabilities are WCInv inflows so just net the number.
I just do non cash curent assets - non debt current liabilities.
Calculate by checking the change in each individual item, over time, and then add upp the changes.
I also find it a bit confusing, so here’s a summary:
Working capital represents operating liquidity available to the business. It’s part of operating capital, as is also fixed assets (such as plant and equipment). Working capital is “current assets” minus “current liabilities”. Operating assets, on the other hand, are equal to total assets minus cash (and equivalents to cash such as marketable sequrities). Operating liabilities are equal to total liabilites minus total debt (long and short) which leaves things such as accounts payable. “Operating” and “Current” aren’t the same, can’t be interchanged. Positive working capital means that the firm is able to pay off its short-term liabilities.The item Current Liabilities includes the current portion of long-term debt (if such exist) and also Notes Payable along with the more easily identifiable items Accrued expenses and Accounts Payble. Current Assets include cash, marketable securities, accounts receivable, inventory. The phrase “pay off its short-term debt” of course tells us that working capital - as opposed to operating assets and operating liabilities - include cash and marketable securities (long or short) because you normally pay your A/P with cash you hold on your bank account.
Operating assets - in contrast - are long-lived assets used in normal business and not held for resale. The three major categories are property, plant and equipment (including land), natural resources, intangible assets. Since they’re long-lived they can’t include cash and cash-equivalents. The two other groups of assets, besides the operating ditto, are: cash and non-operating assets. The non-operating assets aren’t essential to the business, it could be a holding in some other company for instance, something that has nothing to do with the on-going business but still has value.