Title: What are working capital costs?
Headings: What Are Working Capital Costs?
What Are Working Capital Costs?
Key Takeaways
Which Items Are Included in Working Capital Costs?
Measuring Working Capital for Liquidity Purposes
The Importance of Working Capital Management
Working Capital Example: Coca-Cola

Content: For example, in the manufacturing sector, WCC is often described as the costs associated with converting raw materials to finished product. Significant portions of a manufacturer’s operating budget can be attributed to the purchase and storage of raw materials. A software company, on the other hand, might have larger portions of its current liabilities dominated by research and development (R&D) costs and marketing. Measuring Working Capital for Liquidity Purposes
Working capital (WC) measures the company’s ability to fund day-to-day operations from its most liquid assets. Calculated as the difference between a company’s current assets and its current liabilities, WC is among the most common financial metrics used to decipher whether a company has sufficient liquidity available to meet its short-term requirements. Companies whose current assets exceed their current liabilities are said to have positive WC, while those whose current liabilities exceed their current assets are said to have negative WC. The Importance of Working Capital Management
Working capital is a daily necessity for businesses, as they require a regular amount of cash to make routine payments, cover unexpected costs, and purchase basic materials used in the production of goods. When a company does not have enough working capital to cover its obligations, financial insolvency can result and lead to legal troubles, liquidation of assets and potential bankruptcy. Thus, it is vital to all businesses to have adequate management of working capital. Working capital management is essentially an accounting strategy with a focus on the maintenance of a sufficient balance between a company’s current assets and liabilities.