Working Capital

CFA Level I FRA
#1

Hi,

I just started studying for the CFA Level 1 for June 2014. I have been working in corporate finance at an F500 rotatating through a few different groups.

Can someone help me better understand the concept of working capital? Specifically, when someone refers to the “Working capital needs” of a company. For example, in one of my m&a rotations, we would often ask one of our acquisitions to leave behind a few months worth of working capital for the company? What do these things mean conceptually?

What I understand about working capital:

WC = Current Assets (excl cash) - Current Liabilities.

The chg in wc is used to derive chg in cash as current assets up = cash down, and vice versa.

Working capital gives you an idea of how well you can cover your current liabilities with using your current assets.

Just don’t understand what someone means when they say how much working capital a company needs??

Thanks in advance!!

#2

Usually it means that they need cash and inventory.

#3

s2000, thanks for the fast reply. it is very helpful.

why wouldn’t it just be referred to as inventory needs then? why refer to it as working capital needs?

#4

It’s more than inventory; you might need cash as well.

As for why they say it that way: who knows?