Understanding Working Capital.

The term Working Capital is a very mis-understood term, when one reads the financial press and media.

It is the blood stream of any business, as it is the money needed to run the business, to invest in the business, buying infrastructure, paying staff and also paying for procurement of assets.

if this is miscalculated, the business could run out of cash, and thus potentially fail.
Also, by ‘bungling’ and not understanding the cash in hand means, one cannot use the cash to invest in the business and get a better return or the bad situation, running low on cash and having to borrow and pay a higher rate.

Working capital is a simply the money (cash) locked into running the actual business. When I refer to being locked into the business that cannot be easily used.

Also with the financial crisis, the ability to borrow is not always feasible, in risk adverse markets, if a company is in distress, and is running low on cash, then the company may not be able to borrow, locked out of capital markets, just look at The Royal Bank of Scotland, in the Autumn of 2008, unable to access cash from the global liquidity markets and fund its day to day operations, at which point the UK HM Government had to rescue the bank, as it was unable to borrow on the financial markets, and needed a life line from The Bank of England, and the same was true in 2007, when Northern Rock had to borrow £30 billion from The Bank of England, when it too was locked out of the capital markets.

Thus well run companies have a close watch on working capital, and have also a “headroom” where they can borrow on re-arranged credit facilities to allow them to access funding.

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