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Applying CFO Mind-set to 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.

For example, an office supplies company sells supplies to a customer on full credit with invoice terms of net 30 days. As this is a total credit sales, the full sales amount counts as an account receivable.

Cash

Cash is a familiar concept but it can be formally defined as an asset account of unrestricted funds.

For example, a business has a net cash balance of $100,000 in its bank that increases by the amount of customer checks deposited on a given day.

Inventory

Inventory refers to materials, work-in-progress, and finished products within the company’s possession which has value if sold.

For example, an electronics equipment manufacturer calculates its inventory value by totaling the value of all prepared equipments in the warehouse, semi-finished equipments in production, and all raw materials.

Accounts payable

Accounts payable is the amount owing for items or services bought on credit for which an invoice is outstanding.

For example, a company may have monthly invoices for cleaning, paper delivery, and utility bills that need to be paid within a specified period.

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