Short-term debt is considered part of a company's current liabilities and is included in the calculation of working capital. The short-term debt must be repaid by a company within a year. Since working capital is calculated as a company's current assets, less current liabilities, short-term debt reduces working capital.

Short-Term Debt

Short-term debt is typically borrowed by a company to fund its current operations, such as purchasing raw materials, paying its vendors, and prepaying certain expenses. Also, sometimes a company lumps all of its short-term debt together with a current portion of the long-term debt, both of which are included in the current liabilities of the company's balance sheet. Therefore, any reclassification of long-term debt into short-term debt or any company's borrowings due within a year reduces the working capital.

Short-Term Debt Considerations

There are certain instances when a company incurs short-term debt by borrowing from creditors but promptly rolls over its short-term debt balance when it is due by taking credit again on a short-term basis. In this case, an investor should evaluate if it is reasonable to assume a company's short-term debt will be rolled over again and, therefore, exclude this debt balance from the working capital calculations.

Adjusted Working Capital

In certain instances, investors want to consider only current assets and liabilities that relate to a company's operations and exclude any current accounts that have to do with a company's financing operations, such as short-term debt. In this case, short-term debt does not affect the calculations of the adjusted working capital.