PDSnet Glossary

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Introductory Technical Fundamental Economics Opinion Sectors International Regulatory Other Markets

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Definition

Money which is tied up in the workings of the company. It is usually calculated by adding the company's debtors and inventory (stock) and then subtracting its creditors and other current liabilities. Most companies try to keep their working capital to a minimum because it ties up money on which they must pay interest and which could be used for other activities and which incurs interest. Companies in manufacturing tend to have both stock and a debtors' book of customers who have bought their products, but not yet paid for them. The debtor's book is usually payable within 30 days and many companies offer a discount if the payment comes in within that time. The stock position is also complex. Ideally you want to have the absolute minimum amount of stock - but then at the same time you do not want to be out of stock when your customer gives you a large order - because then he might go to your competitor rather than wait for his order to be filled. Of course, service companies tend to have little or no stock or debtors - but they can still run their creditors out 30, 60 or 90 days. This basically means that they can have negative working capital. There are various ratios which can be used to determine how well stock and debtors are being managed. They are called management ratios and include the debtor's days outstanding ratio, and the stock turn ratio.

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