Working CapitalFinancial Dictionary -> General Finance -> Working Capital
All businesses need money. It is required by the business to buy machinery or equipment. This expenditure on fixed assets is known as capital expenditure. The business also needs cash to buy materials, stock, to pay things like wages and other day to day bills like electricity and telephone bills. This day to day money is working capital.
Managing working capital is about ensuring that the money available is sufficient enough to cover these day to day expenses. This is also known as having enough liquidity. If the bills cannot be paid on time there can be serious consequences. In a worst case scenario the company may fail and have to go in to liquidation, selling off its assets to cover its debt. Insufficient working capital is the common most cause of business failure.
The managing of working capital is a continuous process and needs to grow and decrease in an equal ratio to the size of the business. Because when a business is initially started it takes a while to make an income and get a regular customer base, the purchase of stock and initial day to day costs has to be covered by initial capital investment, such as business loan etc. The business will fall into problems if they never reach a point by which they can pay back startup costs.
When there is a lack of working capital it is usually down to poor initial market research (meaning the business wasn't going to succeed to start with) or poor money management.