Working capital

Meaning

Working capital (رأس المال العامل) is current assets (cash, receivables, inventory) minus current liabilities (payables, VAT due, short-term loans). It measures whether the business can meet the next year's obligations from what it will turn into cash in the same period. Positive working capital is a cushion; negative is a warning, unless the business is one that collects before it pays, like a supermarket.

It is also the money the trade itself absorbs. Every day of stock on the shelf and every day a customer takes to pay is cash the business must fund; every day a supplier waits is cash it borrows for free. The cash conversion cycle, inventory days plus receivable days minus payable days, says how many days of sales are funded. Growing businesses run out of cash here, not in the income statement.

Also called: net working capital · current ratio · رأس المال العامل

Example

Al Noor's current assets are 321,080.00 (cash 83,080.00, receivables 142,000.00, inventory 96,000.00) and its current liabilities 75,080.00, so working capital is 246,000.00 and the current ratio 4.3. Its customers take 60 days to pay and its suppliers are paid in 30, so each month of growth needs a month of sales funded in advance.