Title: How Working Capital Works
Headings: How Working Capital Works
How Working Capital Works
Key Takeaways
What Is Working Capital?
Not All Companies Are the Same
Evaluating Companies
The Bottom Line

Content: That $100, which has been tied up for two weeks, is the company's working capital. The quicker the company sells the spaghetti sauce, the sooner the company can go out and buy new ingredients, which will be made into more sauce sold at a profit. If the ingredients sit in inventory for a month, company cash is tied up and can't be used to grow the business. Even worse, the company can be left strapped for cash when it needs to pay its bills and make investments. Working capital also gets trapped when customers do not pay their invoices on time or suppliers get paid too quickly or not fast enough. The better a company manages its working capital, the less it needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors. Not All Companies Are the Same
Some companies are inherently better placed than others. Insurance companies, for instance, receive premium payments upfront before having to make any payments; however, insurance companies do have unpredictable cash outflows as claims come in.