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Managing Working Capital

Calculating working capital

Every organization needs money to run smoothly. This money pays for employee salaries, office expenses, purchases, and production costs. One of the CFO’s main jobs is to manage the working capital — that is, make sure these day-to- day organizational operations are funded.

Working capital is not just cash, it’s the company’s current assets minus its current liabilities. Or how much in liquid assets a company has available to support its day-to-day business operations.

Current assets are the total of accounts receivable, inventory value, and available cash. Current liabilities include the total owing in accounts payable. So the formula can be expressed in this way — working capital is accounts receivable plus cash plus inventory, minus accounts payable:

  • accounts receivable — Accounts receivable refers to money owed to a business by customers on account of selling a product or service on credit.
  • cash — Cash is a familiar concept but it can be formally defined as an asset account of unrestricted funds.
  • accounts payable — Accounts payable is the amount owing for items or services bought on credit for which an invoice is outstanding.

Managing working capital

CFOs act to free funds associated with working capital for use in other organizational activities but only after due consideration of overall company strategy. CFOs plan to ensure that enough working capital is constantly available for running the business. As a functional manager though, you’ll most likely deal with only certain components of working capital.