Correction
Working capital is current assets minus current liabilities. It includes the effects of receivables, inventory, and prepayments as well as cash. The difference is not a separate cash account or an amount immediately available to spend.
Follow the underlying accounts
A company can report positive working capital while holding little cash. It may need to sell inventory and collect receivables before it can pay an obligation. Prepaid insurance supplies coverage rather than cash receipts.
Paying an account payable with cash reduces current assets and current liabilities equally. Working capital stays unchanged, but cash decreases. Read the individual accounts and settlement facts before interpreting the unchanged difference.
Where to watch
When this mistake may appear
- A problem reports positive working capital and asks about immediate payment capacity.
- The working-capital amount happens to equal a Cash balance or planned expenditure.
Check your work
Your work may contain this mistake if:
- Calls the working-capital difference cash on hand.
- Ignores that receivables, inventory, prepayments, and liabilities are components of the difference.
- Treats unchanged working capital after paying Accounts Payable as evidence that Cash did not change.