Definition of Working Capital
Working capital is defined as the amount by which a company’s current assets exceed its current liabilities.
How Working Capital Can be Improved
Some of the ways that working capital can be increased include:
- Earning additional profits
- Issuing common stock or preferred stock for cash
- Borrowing money on a long-term basis
- Replacing short-term debt with long-term debt
- Selling long-term assets for cash
In addition to increasing working capital, a company can improve its working capital by making certain that its current assets are converted to cash in a timely manner. For example, if a company can better manage its inventory and its accounts receivable, the company’s cash and liquidity will increase. This in turn improves the company’s working capital. Similarly, if the company can negotiate more favorable credit terms with its suppliers, the company will have the benefit of having a larger cash balance (even though the amount of working capital will not change).
