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Finance: What is working capital? 268 Views
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Description:
A company’s ability to cover its short-term debts with its current liquid assets, which can be cash, inventory, and accounts receivables, is described as its working capital. The working capital ratio formula is current assets divided by current liabilities. A healthy working capital ratio of 1.5-2.0 is a sign of both good management and a reduced risk profile, as a sudden crisis could be better weathered than with a company operating on thin margins with cash flow issues and a barely 1.0 ratio.
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Transcript
- 00:00
finance a la shmoop. what is working capital? alright people say we're opening
- 00:08
a lemonade stand. I seed what you did there. unfortunately we can't just blink [man stands in front of stage]
- 00:13
our eyes like Aladdin's genie and you know make it all happen. magically we
- 00:17
don't need a ton of money to start things but we need some money in advance. [genie comes out of lamp]
- 00:21
of you know when we begin collecting revenues well we have to rent a location,
Full Transcript
- 00:27
and pay six months rent in advance, and we got to buy about 87 pounds of
- 00:32
sugar and 4,000 lemons and hundred fourteen huge bottles of purified water,
- 00:36
oh and cups we need eight thousand cups. all told it costs about 50 grand in
- 00:42
capital, working capital. see we did there, we need before we can start to run the
- 00:48
business, and you know pay employees and so on .so we get an investor TBOG. the [people stand in line for lemonade]
- 00:54
bank of Grandma. yeah we love her. she gives us a hundred grand. well that
- 00:58
entire hundred grand invested into our little business is our total working
- 01:03
capital. right? fifty grand and start the business working and we got 50 left over
- 01:07
or just in case things don't start up as quick as we hope .its capital that lets
- 01:12
us start working. in cleverly named there. all right well 50 grand we know we're
- 01:16
gonna spend 50 grand and cover the time in between when we're up and running and [calendar]
- 01:20
revenues and all the other stuff start to kick in. and well yeah it's that
- 01:23
simple. put together an actual drinkable lemonade recipe ?well that's just a
- 01:27
little bit harder. working capital. live it love it breathe it. [ grandma grimaces]
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