WORKING CAPITAL TERMINOLOGY PRESENTATION BY: AGHA SUMAIR KHAN PATHAN (PAF-KIET)

We begin our discussion of working capital policy by reviewing some basic definitions and concepts: Working capital: sometimes called gross working capital, simply refers to current assets used in operations. Net working capital: is defined as current assets minus current liabilities.

Working capital: sometimes called gross working capital, simply refers to current assets used in operations.

Net working capital: is defined as current assets minus current liabilities.

Net operating working capital (NOWC): is defined as operating current assets minus operating current liabilities. Generally, NOWC is equal to cash, accounts receivable and inventories less accounts payable and accruals. The current ratio: is calculated by dividing current assets by current liabilities and it is intended to measure liquidity. However, a high current ratio does not ensure that a firm will have the cash required to meet its needs. If inventories cannot be sold, or if receivables cannot be collected in a timely manner, then the apparent safety reflected in a high current ratio could be illusory.

Net operating working capital (NOWC): is defined as operating current assets minus operating current liabilities. Generally, NOWC is equal to cash, accounts receivable and inventories less accounts payable and accruals.

The current ratio: is calculated by dividing current assets by current liabilities and it is intended to measure liquidity. However, a high current ratio does not ensure that a firm will have the cash required to meet its needs. If inventories cannot be sold, or if receivables cannot be collected in a timely manner, then the apparent safety reflected in a high current ratio could be illusory.

The quick ratio or acid test: also attempts to measure liquidity and it is found by subtracting inventories from current assets and dividing by current liabilities. The quick ratio removes inventories from current assets because they are the least liquid current assets. Therefore, the quick ratio is an “acid test” of a company’s ability to meet its current obligations. Cash budget: The best and most comprehensive picture of a firm’s liquidity position is shown by its cash budget. This statement which forecasts cash inflows and outflows focuses on what really counts namely the firm’s ability to generate sufficient cash inflows to meet its required cash outflows.

The quick ratio or acid test: also attempts to measure liquidity and it is found by subtracting inventories from current assets and dividing by current liabilities. The quick ratio removes inventories from current assets because they are the least liquid current assets. Therefore, the quick ratio is an “acid test” of a company’s ability to meet its current obligations.

Cash budget: The best and most comprehensive picture of a firm’s liquidity position is shown by its cash budget. This statement which forecasts cash inflows and outflows focuses on what really counts namely the firm’s ability to generate sufficient cash inflows to meet its required cash outflows.

Working capital policy: refers to the firm’s policies regarding, (a) target levels for each category of current assets and (b) how current assets will be financed. Working capital management: involves both setting working capital policy and carrying out that policy in day-to-day operations.

Working capital policy: refers to the firm’s policies regarding, (a) target levels for each category of current assets and (b) how current assets will be financed.

Working capital management: involves both setting working capital policy and carrying out that policy in day-to-day operations.