From the course: Cash Flow Cycles and Analysis

Total working capital and operating working capital

From the course: Cash Flow Cycles and Analysis

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Total working capital and operating working capital

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- [Instructor] Let's begin with the definition of total working capital. The total working capital for business is equal to all of the current assets on its balance sheet, less all of the current liabilities on its balance sheet. Now, let's dive in a little deeper to look at what current assets could include. It's essentially anything that would be expected to be turned into cash in the next year. It includes things like cash, which is obviously already cash, accounts receivable, inventory, and short-term investments. Then on the current liability side, it's things that are expected to be paid in the next 12 months. That includes accounts payable, short-term debt, or current portion of long-term debt, bank overdrafts, et cetera. So you can see here that there are quite a few accounts that make up current assets and current liabilities. Now, sometimes we are talking about operating working capital specifically, not total working capital. Operating working capital includes three main accounts, the accounts receivable of the business, the inventory of the business, and the accounts payable that are owed by the business. These three core accounts make up operating working capital. The reason that it's just these three accounts that make it up is that when you think of the business, these are the three core accounts. Accounts receivable is all the payment that's owed by customers on revenue from the income statement. Inventory represents cash that's tied up on the balance sheet in products that have not been sold yet. Ultimately, it will flow out of the balance sheet into cost of goods sold on the income statement. And then you have accounts payable, which represents most of the other expenses such as paying vendors and suppliers, et cetera. So when you think of the core operations of the business, forgetting any financing that's going on in the company or investments, then you just have these three core accounts that make up operating working capital.

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