Working capital

The formula

Working capital = current assets − current liabilities

Current assets are things that turn into cash within a year: stock, debtors, cash and bank, short-term advances. Current liabilities are dues payable within a year: creditors, short-term loans, taxes payable, expenses due. A positive figure means the business has its own money or long-term funds supporting day-to-day trade. A negative one means suppliers or short-term borrowing are funding it.

Example

This distributor needs ₹22,00,000 of its own or long-term money to keep trading. If debtors stretch by 15 days on monthly sales of ₹60,00,000, another ₹30,00,000 gets tied up, which is more than the whole working capital. That is why collections matter as much as sales.

What moves it

• Slower collections raise debtors and the need for working capital.
• Buying more stock than needed, or holding dead stock, does the same.
• Longer supplier credit lowers it, but only while suppliers agree.
• Profits kept in the business add to it; drawings and asset purchases from trade money reduce it.

Our guide on the working capital cycle shows how to count it in days, and cash flow management for MSMEs covers what to do about it.

Where it shows up in TallyPrime

TallyPrime's Balance Sheet shows Current Assets and Current Liabilities as groups, so the two totals are there on one screen; the difference is your working capital. Check that loans and advances are placed in the right groups, or the figure will mislead. Cashflow OS shows the Balance Sheet, receivables, payables and stock from the synced Tally data on the phone, along with a cashflow forecast.