Title: Working capital - Wikipedia
Headings: Working capital
Working capital
Contents
Calculation
Inputs
Working capital cycle
Definition
Meaning
Working capital management
Decision criteria
Management of working capital
See also
References
External links

Content: Meaning
A positive working capital cycle balances incoming and outgoing payments to minimize net working capital and maximize free cash flow. For example, a company that pays its suppliers in 30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days. This 30-day cycle usually needs to be funded through a bank operating line, and the interest on this financing is a carrying cost that reduces the company's profitability. Growing businesses require cash, and being able to free up cash by shortening the working capital cycle is the most inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle because it provides them with an idea of the management's effectiveness at managing their balance sheet and generating free cash flows. As an absolute rule of funders, each of them wants to see a positive working capital because positive working capital implies there are sufficient current assets to meet current obligations. In contrast, companies risk being unable to meet current obligations with current assets when working capital is negative. While it's theoretically possible for a company to indefinitely show negative working capital on regularly reported balance sheets (since working capital may actually be positive between reporting periods), working capital will generally need to be non-negative for the business to be sustainable
Reasons why a business may show negative or low working capital over the long term while not indicating financial distress include: Assets above or liabilities below their true economic value
Accrual basis accounting creating deferred revenue while the cost of goods sold is lower than the revenue to be generated
E.g. a software as a service business or newspaper receives cash from customers early on, but has to include the cash as a deferred revenue liability until the service is delivered. The cost of delivering the service or newspaper is usually lower than revenue thus, when the revenue is recognized, the business will generate gross income.