A:

Working capital represents the difference between a firm’s current assets and current liabilities. For well-run firms, managing working capital is simply a daily occurrence it can easily handle. For other firms, the way the process is handled can indicate financial distress.

The impact of working capital changes are reflected in a firm’s cash flow statement. Specifically, the operating cash flow section of the cash flow statement details changes in its shorter-term working capital needs. A positive working capital figure (current assets are greater than current liabilities) means a cash inflow for the period measured. In contrast, a negative working capital position means the firm has spent more cash out than it brought in managing its working capital, or commitments, within a year. Analyzing changes in working capital can be important for any business, but is especially important for firms with seasonal or erratic cash flow needs.

For instance, retailing giant Wal-Mart Stores Inc (WMT), like most retailers, spends a considerable amount of working capital prior to the all-important holiday selling season.

Looking at Wal-Mart’s 2013 quarterly cash flow statement (fiscal third quarter ended October) prior to the calendar fourth quarter, we can see that it spent nearly $7 billion (reflected as a cash outflow) on inventory. This contrasts sharply with the other three quarters. In its first and second quarters, spending on inventory was minimal and came in at $584 million (a cash inflow) and negative $15 million. In the fourth quarter, inventory decreased by a wide margin and brought in nearly $4.5 billion in working capital.

On the other side, Blockbuster, the video rental chain that went bankrupt, had a working capital situation that was much grimmer. In fiscal 2010, its change in accounts payable and accrued expenses totaled a cash outflow of nearly $250 million and it came following a reported loss of close to $600 million. At the time, cash on hand was only $190 million. With a negative working capital, the company was not able to meet its short-term obligations. Later that year, the firm filed for bankruptcy.

The Bottom Line

Most of the time, a company’s working capital is simply a core part of its daily operations. But it can indicate financial problems, especially when working capital runs in the negative for an extended period of time.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

RELATED FAQS
  1. Can working capital be negative?

    Learn under what circumstances negative working capital can arise and what it means when working capital stays negative for ... Read Answer >>
  2. What can working capital be used for?

    Find out what working capital is used for, including how to calculate this financial metric by subtracting current liabilities ... Read Answer >>
  3. Does working capital include stock?

    Discover what a company's working capital is and what it includes, how it is used, and what positive and negative figures ... Read Answer >>
  4. Why is working capital management important to a company?

    Learn about a company's working capital; good working capital management is essential to maintaining a company's liquidity ... Read Answer >>
  5. What does low working capital say about a company's financial prospects?

    Find out what it means when a company has low working capital, including how this metric is interpreted based on business ... Read Answer >>
  6. What does a low working capital ratio show about a company's working capital management?

    Find out the significance of working capital management for a company and look at the working capital ratio analysts use ... Read Answer >>
Related Articles
  1. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  2. Investing

    Retail vs. Tech: How These Companies Use Working Capital

    Learn about the difference between retail and tech businesses' use of working capital and why working capital varies so widely in the technology sector.
  3. Investing

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  4. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  5. Markets

    Explaining Working Capital Turnover

    Working capital turnover is a ratio that helps show how efficiently a company is generating revenue per dollar of cash available to spend on operations.
  6. Investing

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  7. Investing

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  8. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  9. Investing

    Cash Flow On Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
  10. Managing Wealth

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
RELATED TERMS
  1. Working Capital

    Working capital is a measure of both a company's efficiency and ...
  2. Days Working Capital

    An accounting and finance term used to describe how many days ...
  3. Gross Working Capital

    The sum of all of a company's current assets (assets that are ...
  4. Working Capital Management

    A managerial accounting strategy focusing on maintaining efficient ...
  5. Cash Flow From Investing Activities

    An item on the cash flow statement that reports the aggregate ...
  6. Cash Flow Statement

    One of the quarterly financial reports any publicly traded company ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center