Working capital explained

[@TheFinanceStoryteller]

Enjoyed this video? Then please subscribe to the channel, and watch the related videos on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk and managing accounts receivable DSO (Days Sales Outstanding): kzbin.info/www/bejne/mqaxYXV3jp6EbtU

[@vishalhegde7004]

Could you elaborate on what you meant by saying that negative working capital is a good thing? isn't it a bad thing as it means that the company doesn't have enough current assets to meet its current liabilities?

[@stephenfrost1487]

@@vishalhegde7004it is a source of financing for the business.

[@salmoneous100]

You and I, Sir are going to be best friends for the next 8 weeks. Edit: i've graduated

[@TheFinanceStoryteller]

Deal! Invite some more people and we'll have a big finance party. ;-)

[@TheFinanceStoryteller]

Hey Sam, how did you like our 8 week friendship so far? ;-)

[@737Shivamp]

@@TheFinanceStoryteller i am just loving it

[@TheFinanceStoryteller]

@@737Shivamp Thank you! :-)

[@marciamayele3584]

You explained in 5 minutes a chapter of 50 pages. I will be back here often.

[@TheFinanceStoryteller]

Welcome, Marcia! Great to hear that. Please subscribe, and share with your friends and colleagues.

[@JackMajor]

It just clicked for me when you described how third parties are literally financing the operations as working capital with outstanding payables that are unearned revenues in MS' books. Your channel is amazing. Vielen dank!

[@TheFinanceStoryteller]

Gern geschehen! Thank you for watching and commenting.

[@Christopher-yc5py]

Great video. Simply, clear, and straight to the point. Thank you!

[@TheFinanceStoryteller]

Agree! ;-) Have a look at the sequel on working capital management as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@bornesmouthbarnsman]

Very informative video as always! I love the real life examples!

[@TheFinanceStoryteller]

Thanks for the feedback! I enjoyed making the video. :-)

[@1234piano]

Excellent, direct teaching! It's easy to understand. Thank you.

[@TheFinanceStoryteller]

Glad it was helpful! Thank you for watching and commenting! Please subscribe, and watch the related video on working capital management as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@raflop456]

@3:20 I was always confused about CCC when units were in days. However, seeing in it from the balance sheet in $ units the CCC formula makes much more sense. Thanks.

[@TheFinanceStoryteller]

Great to hear that, Rafael!!!! Yes, for some people $ is more intuitive, for others days. Good to understand both!

[@maze.p]

Thanks a lot this was super helpful... and every second of the video informative

[@konstancyja82]

Amazing amount and quality of information! And definitely better than at school

[@TheFinanceStoryteller]

Thank you!

[@bigzooboss1686]

i finally understand the true meaning of working capital. thank you!

[@TheFinanceStoryteller]

Happy to help! More videos on the various aspects of working capital management in this playlist: kzbin.info/www/bejne/eovLeYaIacRseJY&pp=gAQBiAQB

[@yinyin7614]

Great teacher. Thanks for producing such high quality video.

[@TheFinanceStoryteller]

Thanks for watching! Have you seen the related video on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk as well?

[@yinyin7614]

@@TheFinanceStoryteller keep watching your video.

[@shreya1698]

Thank you so much 😊 It cleared my concept

[@TheFinanceStoryteller]

Great! It's a very very important one, as a company's profit does not equal its cash flow, unless working capital is managed very well: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@neb2086]

Woww I have to read a 30 page article for tomorrow on working capital You sir just saved the day

[@TheFinanceStoryteller]

Awesome! Happy to help. Please be aware that not everybody defines working capital in the same way. More on that in the related video: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@jaleesadavis5061]

Very helpful video. This really helped me understand.

[@TheFinanceStoryteller]

Great to hear that, Jaleesa! I have some related videos on for example inventory management kzbin.info/www/bejne/eovLeYaIacRseJY and days sales outstanding kzbin.info/www/bejne/mqaxYXV3jp6EbtU as well that might be helpful to you too.

[@marcjosephferrer3262]

it's a really good definition. thank you

[@TheFinanceStoryteller]

Nice to hear that, thank you! :-)

[@antentoila853]

Excellent sir! This video is so useful for my study ❤ thank you so much.

[@TheFinanceStoryteller]

Most welcome! Related videos on individual items within working capital in this playlist: kzbin.info/www/bejne/eovLeYaIacRseJY&pp=gAQBiAQB

[@walacerosalaurindo]

Excellent video!

[@TheFinanceStoryteller]

Thank you very much! Here's the link to the sequel on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@walacerosalaurindo]

​@@TheFinanceStoryteller Thank you so much Philip! I really love your work! Best regards from Brazil

[@TheFinanceStoryteller]

Greetings back from the Netherlands! Please spread the word about the channel.

[@4751ludo]

Awesome video, thank you so much !

[@TheFinanceStoryteller]

Nice to hear that! Thank you! I have follow-up videos on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk and inventory management kzbin.info/www/bejne/eovLeYaIacRseJY that might be interesting to watch as well.

[@caprepdiaries1214]

This is my first video on your channel that i have watched. And thank you for giving me this conceptual clarity. Will sure watch the other stuff you have put. Also I wanted to ask whether there are other channels you recommend who can give such concise understanding of finance concepts. Actually I am a CA student so I really wanna understand the basic concept what I am learning.

[@TheFinanceStoryteller]

Welcome to the channel! Have a look at my follow-up videos on working capital management, DSO, current ratio, etc. as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk If you go my channel, you will see various tabs: videos, playlists, community, etc. One of these tabs is channels, where I placed the link to some related channels that I think are worthwhile. Have a look!

[@caprepdiaries1214]

@@TheFinanceStoryteller thank you for the reply :)

[@shubhamsachdevardias8155]

Thank you i was suffering in understanding the practical meaning working captial but you made it easy.😇

[@TheFinanceStoryteller]

Happy to help! Here's the link to the sequel on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@pacoquero6329]

Te daba un abrazo churri, 3 años de carrera de ade y no me enterao hasta que he visto tu video. Ere mas grande que Pellegrini

[@AnkushSharma-zv5hv]

thanks for saving my life

[@TheFinanceStoryteller]

Thank you for the compliment. Happy to help!

[@linengmiao]

Could you elaborate on why at 1:40 the cash flow is higher for option B than option A? In both cases the same amount of money will be paid (ie the same amount of money will flow) if I am not mistaken.

[@mohammedabbasmoaiyadi5522]

In option B - High Turnover of inventory due to J.I.T (which corresponds to greater mobilization in Sales Revenue) coupled with Customers paying cash on delivery (which is minimizing or eliminating the effect of potentially Outstanding Accts Receivable) means Cash Resources are generated faster in the operating cycle. Also, bcoz of J.I.T - inventory, holding costs will reduce significantly which means many expense line items will be reduced resulting in greater profits. In option A - Pay suppliers Cash on Delivery - so cash immediately goes out. Hold high inventory levels - high inventory is parked in the Balance Sheet. This increases inventory holding costs as well (as opposed to option B). Plus, it also corresponds to lower Sales Revenue Generation compared to option B because inventory is a driver of Sales. Grant customer 45 days credit - contributing to stagnant Accts Receivable. So the money which supposed to be ours is stuck with the customers. All of this above strains Cash Resources. To conclude - if you consider the very short term - option B generates Cash Resources quicker than A. So B is a safer strategy.

[@TheFinanceStoryteller]

Amount of money paid is the same, however the timing of the incoming and outgoing payments is different, and that's what working capital management and cash flow management tends to be mostly about.

[@Kadusalechrstnjy]

Well said very informative

[@TheFinanceStoryteller]

Thank you very much, Christine! Take a look at the sequel on working capital management as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@jimbokraut640]

Loved the video, please could you do a video on how working capital statement is prepared?

[@TheFinanceStoryteller]

Thank you! I am not sure what a working capital statement is, so cannot help you there.

[@jimbokraut640]

​@@TheFinanceStoryteller Thank you for your reply. Let me try and explain, perhaps my terminology was incorrect. I am trying to understand that before any corporation begins its activities (any industry; from software to manufacturing), considering that its creditors will be paid after X days, and its debtors will pay in Y days, How does the firm ascertain how much finance/cash is needed on a monthly basis to actually run the business? Since Cash inflows and Outflows will not be immediate, how does it ensure that it doesnt run out of pocket?!

[@TheFinanceStoryteller]

First of all, raising enough capital to cover the development, prototyping and commercialization stage of their growth curve, as well as the intense working capital need during early growth and scale up. As a start-up X is likely to be shorter than Y, something that is often underestimated. It is also advisable to do a sensitivity analysis on key variables: what if the "go live" is delayed by several months, what if the R&D effort is 10% over budget? Three suggestions of videos on aspects of this: 1) Revenue, profit and free cash flow in the business plan kzbin.info/www/bejne/fHSTi4J6jKutptE 2) Cash flow patterns across a business lifecycle kzbin.info/www/bejne/i3jHY5-ie6ecg6M 3) Cash flow forecasting in Excel kzbin.info/www/bejne/joe6h2Seftici9U Hope this helps!

[@jimbokraut640]

@@TheFinanceStoryteller Thanks a ton, will def look at the video links, Cheers

[@TheFinanceStoryteller]

Happy to help! Important to add that however you do the modeling, keep in mind to update along the way with latest data, latest insights, latest timing, etc. Work in iterations, and incorporate what you learn along the way.

[@reviewsfrommydailylifeeb798]

Shouldn't the Working Capital calculation take "Cash" as well in the current assets?

[@TheFinanceStoryteller]

That depends..... Do you want to live in the world of textbooks, or in the world of real companies? Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life as well as in my videos, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See also the video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@Dagzzzz1738]

Hello mister! I want to ask why you did not include cash in the calculation of working capital? Thanks

[@TheFinanceStoryteller]

Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. I use that latter definition.

[@mencheswest8993]

Great video thanks! do we consider short-term/long-term financial debt as input to this formula?

[@TheFinanceStoryteller]

Hello Max! No, just accounts receivable, inventory, accounts payable.

[@mrnikhil4898]

Sir, why haven't u considered cash and cash equivalent in current asset? because on yahoo finance i see them considering cash in calculating working capital. Is that wrong!

[@TheFinanceStoryteller]

Hello Mr Nikhil! Sadly, there is no unified definition of working capital, but different definitions are in circulation. I stick to the one that I find most useful and actionable, and that we used when I worked at General Electric: accounts receivable + inventory - accounts payable, and in some business also minus progress collections (deferred revenue). Using that definition, if working capital goes down, then cash goes up, and vice versa. See also my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable.

[@mrnikhil4898]

@@TheFinanceStoryteller Thank u for detailed explaination🤗

[@TheFinanceStoryteller]

Happy to help!

[@SportSphere360_]

Thanks nice and quick video. But why is the negative working capital is good, because you don’t any working capital, I never thought in this way

[@TheFinanceStoryteller]

If working capital is negative, then the sum of accounts receivable and inventory is smaller than the amount in accounts payable (using a simple example where those three are the only items of working capital, which is correct for most but not all companies). In business terms, your suppliers (accounts payable) are financing your business more with "free loans" than you are providing free loans to customers (accounts receivable) and holding inventory. See also my video on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk and my discussion of the current ratio kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@SportSphere360_]

@@TheFinanceStoryteller thanks dear. Do you discuss Stocks as well. if so lets Discuss Ticker NKLA and ORCL and their future

[@SportSphere360_]

@@TheFinanceStoryteller one more thing i just check Oracle's Financials on their website. They have Accrued compensation and related benefits and Deferred revenues so will we include them. If so then here is the working AR 4576 - AP 534 - Accrued comp 1,390 - Deferred Revenue 9875 = -7,223 so suppliers and customers are sponsoring their business

[@TheFinanceStoryteller]

I only discuss stocks that I have studied in detail and/or that I have a position in. With NKLA and ORCL, neither is the case.

[@TheFinanceStoryteller]

I would suggest to calculate Oracle's working capital in a similar way to how I calculated Microsoft's working capital as an example in the video. It is not uncommon for software companies to have a negative amount of working capital, due to deferred (unearned) revenue kzbin.info/www/bejne/iX_KpoyvgNekgpY

[@FarhaN-wg9qz]

Hi, thank you for your clear explanation of the working capital! I appreciate the work and effort you put in your videos!! I've a question, I hope you can answer me. In my financial analysis class, the teacher talks about working capital but also working capital need (or requirement). But I really cannot understand what's the difference between both. And he said that a negative working capital is bad since this means that the company hasn't enough cash to pay it's short term debts. However a working capital need that is negative means the company has enough operating sources to finance its operating cycle. I'm a little bit confused about the difference between both notions and their formulas 😓

[@TheFinanceStoryteller]

Hello! Thank you for your kind words. I am not sure what your teacher is talking about either. I can try to make guesses, but it would be better to ask him or her directly. Also make sure you ask what he or she is including in their scope/definition of working capital (in terms of which balance sheet line items are in the calculation), as that is not a uniform definition. And lastly, check whether your teacher has ever worked in the real world on managing working capital as a finance or business person. Textbook world often differs from real world business. For example.... Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk There is more than one way to think about working capital, look at what the company really needs, and only then decide how working capital fits into the picture. Furthermore, "good" or "bad" are very subjective. For example, textbooks will suggest that a current ratio (a ratio to measure liquidity, related to working capital management) above 1 or even 1.5 is desirable. I can make the case that 0.5 is great, as well as the case that 2 is great. It all depends! See my discussion of current ratio, featuring the numbers of McDonald’s, Microsoft, Verizon and Walmart kzbin.info/www/bejne/mpzMhIqFZ7SMntE My apologies if you are now "confused at a higher level". ;-) Just wanted to give some example of how the real world has a lot more dimensions and a lot more trade-offs (for example between selling price and credit terms, which affects DSO) than any teacher without real world experience can imagine. I made a fun video about inventory management based on my experience in a multinational company kzbin.info/www/bejne/eovLeYaIacRseJY and one on Days Sales Outstanding (collections performance for accounts receivable) kzbin.info/www/bejne/mqaxYXV3jp6EbtU

[@ladyfaith.5932]

Thanks

[@TheFinanceStoryteller]

Happy to help!

[@shalsteven]

How can negative working capital is a good thing? 😅

[@TheFinanceStoryteller]

I agree that the idea of negative working capital being a good thing is not intuitively clear to everyone. Here's an example. Situation A: accounts receivable $200, inventory $100, accounts payable $50. Working capital is $200 + $100 - $50 = $250. As assets exceed liabilities, the company has to finance the net $250 by either debt or equity. Situation B: account receivable $100, inventory $50, accounts payable $200. Working capital is $100 + $50 - $200 = ($50). The "free loan" from suppliers through accounts payable exceeds the sum of what is needed to provide "free loans" to customers (accounts receivable) plus inventory. Negative working capital situation. Great for cash flow! Apple's working capital is similar to situation B above. Learn more in my videos about working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@aaronhornanfinance-bu8ft]

thank you

[@TheFinanceStoryteller]

You're welcome

[@ii-op1ic]

Hi how do you know or workout if a company has a high working capital which is too high?

[@TheFinanceStoryteller]

That's a very good question, which is difficult to answer. I don't think there are any "absolute" levels of working capital that are too high or too low. If a company wants to generate more cash flow from operating activities, then one way to do that is to decrease the amount of working capital, in that case the working capital "starting point" would be too high. If a small/startup company wants to grow rapidly, it might be increasing working capital as a result (more sales lead to more invoices sent to customers, which lead to more accounts receivable | having availability of product in multiple locations leads to more inventory), therefore the working capital "starting point" would be too low and working capital is increased. "Too high" is therefore a function of the strategy and goals of the company. See also my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@prasannaprasantbashyal2615]

sir ca u explein about net working capitals fundametals please give me some points about them

[@TheFinanceStoryteller]

Hello Prasanna! I think my follow-up video on working capital management might do just that: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@KumR]

So Accounts Receivable falls under Working Capital?

[@TheFinanceStoryteller]

Correct.

[@rgkh1503]

in the example you gave you said that working capital is inventory + trade receivables - trade payables, isn't that the definition of working capital requirement instead?

[@TheFinanceStoryteller]

I have not heard anybody use the term "working capital requirement" before. My definition is based on how the term working capital is used in the real business world.

[@rgkh1503]

@@TheFinanceStoryteller there is a difference between working capital and working capital requirement, or working capital need if you prefer.

[@jonathanlindsey7623]

To efficiently run an economy, as defined by webster's dictionary, you should be able to calculate how allowing businesses to run on a model calling for no need for working capital isn't the preferred option to find debt forgiveness.

[@jaem-em4670]

"you could argue that items such as prepaid expenses on the assets side, and accrued payroll on the liabilities side may also be considered 'in scope' " Why you didn't include? i don't understand you said "in scope"

[@TheFinanceStoryteller]

That is a very good question! Some companies do include them, others don't. I prefer to exclude these items, as they are in most cases immaterial (not big enough to matter), and they are more of an accounting nature (allocating cost between current and future periods correctly) rather than something that operational management can influence directly (like the core working capital items accounts receivable, inventory, and accounts payable). Does that make sense?

[@ivantan3554]

If a question says "additional working capital of $100,000 is required", do I decrease or increase in my cash flow?

[@TheFinanceStoryteller]

If working capital goes up, then cash goes down, so it would decrease your cash flow. See also my video on CFOA (Cash From Operating Activities) vs net income kzbin.info/www/bejne/iYmZpXevbL6DncU

[@oneth789]

just confused. from investopedia vids, higher working capital is better. the higher the current asset than current liability the better. means you have more than enough current asset to cover current liability

[@TheFinanceStoryteller]

Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life (and this video), that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. See also my related video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk If you want to compare current assets to current liabilities, then the current ratio is the thing to look at: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@kvitlim8443]

@@TheFinanceStoryteller That explains the non-textbook items in the 3M and Microsoft examples in your video. Thank you!

[@TheFinanceStoryteller]

@@kvitlim8443 You're welcome! :-)

[@Rosa-wk9yj]

So the lower the working capital the better?

[@TheFinanceStoryteller]

If you want to maximize cash flow, then the lower the working capital would indeed be the better. However, that's not necessarily the best solution in all possible situations, as my video on working capital management discusses: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@john8909]

could you please explain what changes in working capital represents. ik your just comparing two years but I don't understand it, for example why it shows us in the cash flow statement

[@TheFinanceStoryteller]

Hello John! Here's an example. Working capital balance at January 1st $90, consisting of receivables $80, plus inventory of $30, minus payables of $20. Working capital balance at December 31st of $100, consisting of receivables $70, plus inventory $40, minus payables of $10. The change in working capital balance is $10 increase, which means an additional $10 is "stuck" in various places on the balance sheet, while what it really wants is to be cash. Therefore, negative effect of working capital on cash flow, shown as changes in working capital (10) i.e. cash outflow, or one level lower: change in receivables 10 as balance is down therefore cash is freed up, change in inventory (10) as balance is up therefore cash gets tied, and change in payables (10) as balance is down (suppliers getting paid) therefore less "free financing" from the supplier. Does that make sense?

[@john8909]

The Finance Storyteller ohhhh I get it now. I forgot that process of converting those three bs items in the CFO. Thank you master!

[@SK-pv6xl]

Why do you subtract account receivables in the equation?

[@TheFinanceStoryteller]

I don't..... Working capital (real world definition) = accounts receivable, plus inventory, minus accounts payable.

[@damiendemalteris8195]

The two asset categories in working capital?

[@TheFinanceStoryteller]

Hello Damien! Not completely sure what your question is. In the business world, working capital is mostly defined as accounts receivable (assets) + inventory (assets) - accounts payable (liabilities). Textbooks might give you a broader definition of current assets minus current liabilities, but that is not very practical in everyday business use. See also my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@KrishanSingh-gz9op]

As working capital = Current assets - Current liabilities. You are saying that negative working capital is a good thing, to have negative working capital, Current liabilities should be greater Current assets. But if Current assets are less than Current liabilities then Current ratio ( = Current assets/ Current liabilities) will be less than 1. Which means company will face liquidity issues. So, don't you think it's bad to have negative working capital?

[@TheFinanceStoryteller]

Hi Krishan! You are following your textbook too much. It's better to study real world companies. Sometimes it is bad to have negative working capital, at other times it isn't. Here are some examples of very well run companies (without liquidity issues) that have a very high or very low current ratio: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@zaracheung4913]

So Accounts receivable + Closing inventory - Accounts payable = Working capital? And is higher or lower working better?

[@TheFinanceStoryteller]

Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life (and my videos), that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. So be very careful with definitions, as there is no "universal" one! With the definition of working capital that I use: the lower the working capital, the higher the cash flow (which is a good thing). For pros and cons of high and low working capital, see my related video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@zaracheung4913]

Ahh I see thanks!

[@zaracheung4913]

I still cannot calculate my question TT Think I'm going to fail again

[@TheFinanceStoryteller]

Stay calm... breathe in, breathe out, and see if you can follow the logic of the question....

[@QualitativeInvestor]

Philip, How changes in Working capital influence on Free Cash Flow?

[@TheFinanceStoryteller]

What you need to look at is the change of the working capital balance year-over-year (between one balance sheet and the next). The most common definition of working capital out in the real world of corporations is receivables plus inventory minus payables. If receivables go up from one year-end balance sheet to the next, then cash flow goes down (the money is "stuck" in unpaid invoices). If inventory goes up, then cash flow goes down as well (the money is "stuck" in the warehouse). If payables go up, then cash flow goes up (it is taking longer to pay suppliers). My follow-up video on working capital management has more discussion of the drivers of these: kzbin.info/www/bejne/mWbMmpqZetWjkNk Also, my case studies of the cash flow statement walk through this: kzbin.info/www/bejne/j5q4kHeOobGNatU

[@QualitativeInvestor]

@@TheFinanceStoryteller Thank you Phillip.

[@davidroldan6007]

Why the cash and equivalents aren't consider in the working capital?

[@TheFinanceStoryteller]

Hi David! See my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk I use the practical definition of working capital, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable.

[@davidroldan6007]

@@TheFinanceStoryteller Thanks for answering!!! You are one of that channels (very few) that answer the comments and help the people. I am a fan.

[@TheFinanceStoryteller]

@@davidroldan6007 Of course! That's the best part of running a KZbin channel: getting people to think about the ideas you are sharing. I love to get questions, and try to reply as soon as I can. Please subscribe, and spread the word!

[@mauriciolopes8502]

Congratulations. You are very didactic. I have one question: You mentioned that a negative working capital means your customers and suppliers are financing your daily operations. Is it always true or its just for the case when you have unearned revenue?

[@TheFinanceStoryteller]

Thanks for the kind words!!! It certainly helps to have a large amount of deferred/unearned revenue, but some companies like Walmart kzbin.info/www/bejne/m3rNdJSbg9JgjM0 or Apple kzbin.info/www/bejne/gJCUd2t9pLGCf5o get to zero working capital or negative working capital even if you exclude deferred/unearned revenue.

[@peeterzpee]

Hi, why is the relationship between NWC and Cash (as part of current assets) not 0? pay suppliere/hold inventory equally decrease assets and liabilities or simply exchange assets hold in cash with inventory. This only works with fresh equity or long term debt cash?. thanks

[@TheFinanceStoryteller]

The practical definition of working capital, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. Therefore, if working capital goes up, cash goes down. And if working capital goes down, cash goes up. If a retailer for example holds 10 days worth of inventory, all the customers pay cash so days sales outstanding is zero, and payment terms to suppliers are 60 days, then its cash conversion cycle is minus 50 days. In short: getting paid before you have to pay others. A great way to run your business. In terms of journal entries: Debit inventory credit accounts payable (for receipt of goods) Debit cash credit inventory (when the consumer buys items and pays for it in cash rather than on account)

[@neha4909]

Hii, is working capital part of capital (by proprietor) in day to day operation.

[@TheFinanceStoryteller]

Hello Neha! Working capital is the total amount of capital invested into your company’s operating cycle (day-to-day operations). If you want to learn about the relationship between working capital (accounts receivable, inventory, accounts payable) and shareholder capital (equity), then please watch my video on the relationship between income statement and balance sheet: kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@neha4909]

@@TheFinanceStoryteller awwww you so sweet replied to every comment. But what if when there will lot of comments.

[@TheFinanceStoryteller]

The comments are one of the best things of being a KZbinr! :-) It gives a good indication of whether viewers find the videos relevant, and what else they might be interested in. Plus I love to help wherever I can!

[@neha4909]

@@TheFinanceStoryteller that's good

[@KrishanSingh-gz9op]

Can we also express Deferred revenue in terms of days , like DIO, DSO & DPO?

[@TheFinanceStoryteller]

Interesting thought, but I have never heard any cases of that happening. I don't think it would be appropriate, as some contracts are deferred over multiple years.

[@bensontam]

sorry, isn't working capital simply current asset - current liabilities? This means cash, prepaid expenses, other liabilities are included. Why do you exclude them in 3M example?

[@TheFinanceStoryteller]

Hello! There is no single unified definition. Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. If you use the latter, then if working capital goes down, cash goes up. I go through a lot of presentation materials from the investor relations websites of large multinational companies, and all of them use that second definition, or a variation thereof (i.e. things like deferred revenue can also get deducted).

[@dingding4358]

Very educational channel, thank you very much for the excellent class! I am having a question about gift card liabilites here . A company has a negative working capital, and the explanation I got is that the company has tons of gift card liabilities. But what I don't understand is that when they received the cash from the sales of gift cards, the company in the same time records the cash as a current asset, right? So gift card liabilities don't explain the negative working capital...That is what confused me. Could you please help me with this ? Thank you so much!

[@TheFinanceStoryteller]

Excellent question! Gift cards that have not been used by the consumer yet are a type of deferred revenue. You will find the answer to your question in my video on deferred revenue, more specifically the Home Depot example and the T-accounting for the journal entries. Two hints: think through the journal entry when the gift card is sold to the customer (what is the debit, what is the credit), and realize that negative working capital means that the sum of accounts receivable and inventories is smaller than the sum of accounts payable and deferred revenue. Hope this helps. I have not given you a direct answer, but hopefully I am leading you on the right path to find it out for yourself. If you need more help, just let me know. Here's the link to the video on deferred revenue: kzbin.info/www/bejne/iX_KpoyvgNekgpY and here's the link to a related video on revenue recognition: kzbin.info/www/bejne/bmKZgmmmhMZ6rJY

[@isabellal3460]

It’s indeed will be recorded in the current asset. So the deferred revenue does not change the working capital. It’s important that this video stated its way of calculating working capital is different I suppose. While the most conventional way of WC is the difference between current asset and current liabilities.

[@georgekazanchyan4976]

In my textbook it says working capital should be positive. Working Capital = Current Assets - Current Liabilities. My textbook says a positive working capital is a good thing, and negative working capital is not good.

[@TheFinanceStoryteller]

Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. If your working capital is negative according to that latter definition (accounts payable is bigger than the sum of accounts receivable plus inventory), then your suppliers are granting you more credit than the sum of the credit you are granting to your customers plus holding inventory for customers. Isn't that a great way as a business owner to finance your business? The author of your textbook seems to have a limited perspective on real world financial statements. The real world is much more varied than the reductionist mind of a textbook writer can understand. Take a look at my discussion of the current ratio to get some more perspective: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@georgekazanchyan4976]

@@TheFinanceStoryteller I really like your explanations and appreciate your videos! Thank you for providing real world experiences!

[@TheFinanceStoryteller]

Happy to help, George! Take a look at my walk-through of the Walmart balance sheet, I think that illustrates some of the learning points nicely: kzbin.info/www/bejne/m3rNdJSbg9JgjM0

[@mmson9610]

If possible, can you give some examples of working capital in energy sector? Is it correct to assume the energy sector would prefer lower working capital? Many Thanks

[@TheFinanceStoryteller]

When you talk about "the energy sector", I can think of 3 types of players: 1) utilities companies that run a power plant to produce electricity, 2) oil and gas companies that extract products and sell them, and 3) companies that build and sell wind turbines, gas turbines, compressors, etc. I do not have a lot of experience in the energy sector, the most notable was to interact with companies in the 3rd category (producing turbines). Their most important challenge in the field of working capital is to maximize the customer prepayments ("deferred revenue", "progress collections") and to build and install the turbine as fast and accurately as possible, to transfer the asset to the customer (companies in the 1st and 2nd categories). Hope this helps!

[@keshavkapoor4594]

So working capital is not “all current assets (which includes cash) - all current liabilities” ??

[@TheFinanceStoryteller]

Hi Keshav! That depends. In the business world, working capital is mostly defined as accounts receivable (assets) + inventory (assets) - accounts payable (liabilities). Textbooks might give you a broader definition of current assets minus current liabilities, but that is not very practical in everyday business use. See also my video on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@keshavkapoor4594]

@@TheFinanceStoryteller thank you

[@vivienneemeni3388]

Option B

[@TheFinanceStoryteller]

That's what I prefer as well!

[@martinhernandez1691]

I thought working capital was current assets minus current liabilities in this case wouldn't it be 169,662-58,488=111,174 for Microsoft? In regards to working capital.

[@TheFinanceStoryteller]

A big part of Microsoft's current assets consists of short term investments, I would hardly call that "working" capital, as it is not needed for Microsoft's day-to-day operations. Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable, and minus (in the case of Microsoft and many other tech companies) unearned/deferred revenue.

[@flavio___lira]

Do you offer a premium subscription via patreon or KZbin? I'd be happy to participate and get more of the valuable knowledge you share with the community!

[@TheFinanceStoryteller]

Thank you very much for the kind words! I consider that a huge compliment. :-) All my videos are free to watch on KZbin. My premium offerings are classroom trainings and/or webinars customized to the client (i.e. focusing on the financial statements of the company and competitors), as well as business simulations. For viewers (e.g. Certified Public Accountants) interested in receiving CPE credits for watching the videos, I partner with online learning platform illumeo, www.illumeo.com (discount code Devroe10).

[@charlottepearson8]

I love you

[@TheFinanceStoryteller]

Thank you, Charlotte! 😘

[@AllStar4261]

Dame Dash brought me here

[@TheFinanceStoryteller]

Welcome! Enjoy the videos on this channel.

[@uxepictetus]

It was explained well, but I still didn't understand it. :((

[@TheFinanceStoryteller]

Sorry to hear that! Maybe start with the operational side of things, like inventory management kzbin.info/www/bejne/eovLeYaIacRseJY or what is called the "cash conversion cycle" kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@QualitativeInvestor]

But how come Negative Working capital is a good thing? kzbin.info/www/bejne/jqercp-rnpJ1pNE When they have more Current Liabilities rather than liquid current assets (cash), so they have not enough cash to cover their day to day operations.

[@TheFinanceStoryteller]

Microsoft (like many of the tech firms) is an unusual case... they have so much cash, cash equivalents and short-term investments, that I would not worry too much about their ability to cover their daily operations! But in general you are right.... having low or negative working capital is great from the perspective of generating free cash flow, but is dangerous in terms of liquidity. It's a trade-off between efficiency and robustness, or in other words asset utilization and asset strength. See my video on the current ratio that discusses the dilemma: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@TheFinanceStoryteller]

Where did you come across the term "working capital"? Let me know by commenting below!

[@ahmedxh]

The Finance Storyteller I read it the a book. Would you be kind enough to go into more details and provide examples on them? Thank you 🙏🏽

[@TheFinanceStoryteller]

@@ahmedxh Hello Ahmed! After watching the "Working capital explained" video above, I would recommend my video on "Inventory turnover" kzbin.info/www/bejne/q5mth2icl7uBj6c and the video on "accounts payable and accounts receivable" kzbin.info/www/bejne/rpDEhoqYhsZrbZo and the one on "deferred revenue" kzbin.info/www/bejne/iX_KpoyvgNekgpY All of these are elements of working capital. Enjoy!

[@jas18320]

Why is cash (a current asset) not considered in your working capital equations? Shouldn't it be current assets minus current liabilities?

[@dbnn10]

​@@TheFinanceStoryteller Why is cash (a current asset) not considered in your working capital equations? Shouldn't it be current assets minus current liabilities?

[@TheFinanceStoryteller]

@@jas18320 There are multiple definitions of working capital in use. Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. Current assets include items such as cash, marketable securities, accounts receivable, inventory, and prepaid expenses. Current liabilities include items such as short-term debt, accounts payable, accrued liabilities, and deferred revenue. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable.