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 Жыл бұрын
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?
@salmoneous1005 жыл бұрын
You and I, Sir are going to be best friends for the next 8 weeks. Edit: i've graduated
@TheFinanceStoryteller5 жыл бұрын
Deal! Invite some more people and we'll have a big finance party. ;-)
@TheFinanceStoryteller5 жыл бұрын
Hey Sam, how did you like our 8 week friendship so far? ;-)
@737Shivamp4 жыл бұрын
@@TheFinanceStoryteller i am just loving it
@TheFinanceStoryteller4 жыл бұрын
@@737Shivamp Thank you! :-)
@marciamayele35843 жыл бұрын
You explained in 5 minutes a chapter of 50 pages. I will be back here often.
@TheFinanceStoryteller3 жыл бұрын
Welcome, Marcia! Great to hear that. Please subscribe, and share with your friends and colleagues.
@JackMajor3 жыл бұрын
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!
@TheFinanceStoryteller3 жыл бұрын
Gern geschehen! Thank you for watching and commenting.
@abuzer_xxx4 жыл бұрын
It’s like a moment when you finally find a really good explanation of accounting stuff, thank you 😘
@TheFinanceStoryteller4 жыл бұрын
Happy to help! :-)
@TheFinanceStoryteller5 жыл бұрын
Where did you come across the term "working capital"? Let me know by commenting below!
@ahmedxh5 жыл бұрын
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 🙏🏽
@TheFinanceStoryteller5 жыл бұрын
@@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!
@jas183204 жыл бұрын
Why is cash (a current asset) not considered in your working capital equations? Shouldn't it be current assets minus current liabilities?
@dylanbrown46964 жыл бұрын
@@TheFinanceStoryteller Why is cash (a current asset) not considered in your working capital equations? Shouldn't it be current assets minus current liabilities?
@TheFinanceStoryteller4 жыл бұрын
@@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.
@Christopher-yc5py Жыл бұрын
Great video. Simply, clear, and straight to the point. Thank you!
@TheFinanceStoryteller Жыл бұрын
Agree! ;-) Have a look at the sequel on working capital management as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk
@bornesmouthbarnsman5 жыл бұрын
Very informative video as always! I love the real life examples!
@TheFinanceStoryteller5 жыл бұрын
Thanks for the feedback! I enjoyed making the video. :-)
@1234piano3 жыл бұрын
Excellent, direct teaching! It's easy to understand. Thank you.
@TheFinanceStoryteller3 жыл бұрын
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
@konstancyja825 жыл бұрын
Amazing amount and quality of information! And definitely better than at school
@TheFinanceStoryteller5 жыл бұрын
Thank you!
@bigzooboss1686 Жыл бұрын
i finally understand the true meaning of working capital. thank you!
@TheFinanceStoryteller Жыл бұрын
Happy to help! More videos on the various aspects of working capital management in this playlist: kzbin.info/www/bejne/eovLeYaIacRseJY&pp=gAQBiAQB
@raflop4562 жыл бұрын
@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.
@TheFinanceStoryteller2 жыл бұрын
Great to hear that, Rafael!!!! Yes, for some people $ is more intuitive, for others days. Good to understand both!
@yinyin76142 жыл бұрын
Great teacher. Thanks for producing such high quality video.
@TheFinanceStoryteller2 жыл бұрын
Thanks for watching! Have you seen the related video on working capital management kzbin.info/www/bejne/mWbMmpqZetWjkNk as well?
@yinyin76142 жыл бұрын
@@TheFinanceStoryteller keep watching your video.
@shubhamsachdevardias8155 Жыл бұрын
Thank you i was suffering in understanding the practical meaning working captial but you made it easy.😇
@TheFinanceStoryteller Жыл бұрын
Happy to help! Here's the link to the sequel on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk
@neb20863 жыл бұрын
Woww I have to read a 30 page article for tomorrow on working capital You sir just saved the day
@TheFinanceStoryteller3 жыл бұрын
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
@maze.p7 ай бұрын
Thanks a lot this was super helpful... and every second of the video informative
@shreya16987 ай бұрын
Thank you so much 😊 It cleared my concept
@TheFinanceStoryteller7 ай бұрын
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
@antentoila8539 ай бұрын
Excellent sir! This video is so useful for my study ❤ thank you so much.
@TheFinanceStoryteller9 ай бұрын
Most welcome! Related videos on individual items within working capital in this playlist: kzbin.info/www/bejne/eovLeYaIacRseJY&pp=gAQBiAQB
@marcjosephferrer32622 жыл бұрын
it's a really good definition. thank you
@TheFinanceStoryteller2 жыл бұрын
Nice to hear that, thank you! :-)
@AnkushSharma-zv5hv4 жыл бұрын
thanks for saving my life
@TheFinanceStoryteller4 жыл бұрын
Thank you for the compliment. Happy to help!
@4751ludo3 жыл бұрын
Awesome video, thank you so much !
@TheFinanceStoryteller3 жыл бұрын
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.
@jaleesadavis50612 жыл бұрын
Very helpful video. This really helped me understand.
@TheFinanceStoryteller2 жыл бұрын
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.
@aaronhornanfinance-bu8ft Жыл бұрын
thank you
@TheFinanceStoryteller Жыл бұрын
You're welcome
@pacoquero63292 жыл бұрын
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
@ladyfaith.59324 ай бұрын
Thanks
@TheFinanceStoryteller4 ай бұрын
Happy to help!
@reviewsfrommydailylifeeb7984 жыл бұрын
Shouldn't the Working Capital calculation take "Cash" as well in the current assets?
@TheFinanceStoryteller4 жыл бұрын
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
@Kadusalechrstnjy2 жыл бұрын
Well said very informative
@TheFinanceStoryteller2 жыл бұрын
Thank you very much, Christine! Take a look at the sequel on working capital management as well: kzbin.info/www/bejne/mWbMmpqZetWjkNk
@FarhaN-wg9qz Жыл бұрын
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 Жыл бұрын
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
@caprepdiaries1214 Жыл бұрын
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 Жыл бұрын
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 Жыл бұрын
@@TheFinanceStoryteller thank you for the reply :)
@walacerosalaurindo6 ай бұрын
Excellent video!
@TheFinanceStoryteller6 ай бұрын
Thank you very much! Here's the link to the sequel on working capital management: kzbin.info/www/bejne/mWbMmpqZetWjkNk
@walacerosalaurindo6 ай бұрын
@@TheFinanceStoryteller Thank you so much Philip! I really love your work! Best regards from Brazil
@TheFinanceStoryteller6 ай бұрын
Greetings back from the Netherlands! Please spread the word about the channel.
@Dagzzzz1738 Жыл бұрын
Hello mister! I want to ask why you did not include cash in the calculation of working capital? Thanks
@TheFinanceStoryteller Жыл бұрын
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.
@jimbokraut640 Жыл бұрын
Loved the video, please could you do a video on how working capital statement is prepared?
@TheFinanceStoryteller Жыл бұрын
Thank you! I am not sure what a working capital statement is, so cannot help you there.
@jimbokraut640 Жыл бұрын
@@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 Жыл бұрын
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 Жыл бұрын
@@TheFinanceStoryteller Thanks a ton, will def look at the video links, Cheers
@TheFinanceStoryteller Жыл бұрын
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.
@mencheswest89934 жыл бұрын
Great video thanks! do we consider short-term/long-term financial debt as input to this formula?
@TheFinanceStoryteller4 жыл бұрын
Hello Max! No, just accounts receivable, inventory, accounts payable.
@ivantan35543 жыл бұрын
If a question says "additional working capital of $100,000 is required", do I decrease or increase in my cash flow?
@TheFinanceStoryteller3 жыл бұрын
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
@SportSphere360_3 жыл бұрын
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
@TheFinanceStoryteller3 жыл бұрын
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_3 жыл бұрын
@@TheFinanceStoryteller thanks dear. Do you discuss Stocks as well. if so lets Discuss Ticker NKLA and ORCL and their future
@SportSphere360_3 жыл бұрын
@@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
@TheFinanceStoryteller3 жыл бұрын
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.
@TheFinanceStoryteller3 жыл бұрын
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
@KrishanSingh-gz9op3 жыл бұрын
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?
@TheFinanceStoryteller3 жыл бұрын
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
@prasannaprasantbashyal26153 жыл бұрын
sir ca u explein about net working capitals fundametals please give me some points about them
@TheFinanceStoryteller3 жыл бұрын
Hello Prasanna! I think my follow-up video on working capital management might do just that: kzbin.info/www/bejne/mWbMmpqZetWjkNk
@john89094 жыл бұрын
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
@TheFinanceStoryteller4 жыл бұрын
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?
@john89094 жыл бұрын
The Finance Storyteller ohhhh I get it now. I forgot that process of converting those three bs items in the CFO. Thank you master!
@mrnikhil4898 Жыл бұрын
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 Жыл бұрын
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 Жыл бұрын
@@TheFinanceStoryteller Thank u for detailed explaination🤗
@TheFinanceStoryteller Жыл бұрын
Happy to help!
@linengmiao4 жыл бұрын
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.
@mohammedabbasmoaiyadi55224 жыл бұрын
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.
@TheFinanceStoryteller4 жыл бұрын
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.
@shalsteven Жыл бұрын
How can negative working capital is a good thing? 😅
@TheFinanceStoryteller Жыл бұрын
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
@jaem-em46703 жыл бұрын
"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"
@TheFinanceStoryteller3 жыл бұрын
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?
@KumR4 жыл бұрын
So Accounts Receivable falls under Working Capital?
@TheFinanceStoryteller4 жыл бұрын
Correct.
@rgkh15037 ай бұрын
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?
@TheFinanceStoryteller7 ай бұрын
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.
@rgkh15037 ай бұрын
@@TheFinanceStoryteller there is a difference between working capital and working capital requirement, or working capital need if you prefer.
@ii-op1ic4 жыл бұрын
Hi how do you know or workout if a company has a high working capital which is too high?
@TheFinanceStoryteller4 жыл бұрын
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
@oneth7894 жыл бұрын
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
@TheFinanceStoryteller4 жыл бұрын
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
@kvitlim84433 жыл бұрын
@@TheFinanceStoryteller That explains the non-textbook items in the 3M and Microsoft examples in your video. Thank you!
@TheFinanceStoryteller3 жыл бұрын
@@kvitlim8443 You're welcome! :-)
@zaracheung49134 жыл бұрын
So Accounts receivable + Closing inventory - Accounts payable = Working capital? And is higher or lower working better?
@TheFinanceStoryteller4 жыл бұрын
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
@zaracheung49134 жыл бұрын
Ahh I see thanks!
@zaracheung49134 жыл бұрын
I still cannot calculate my question TT Think I'm going to fail again
@TheFinanceStoryteller4 жыл бұрын
Stay calm... breathe in, breathe out, and see if you can follow the logic of the question....
@vivienneemeni33883 жыл бұрын
Option B
@TheFinanceStoryteller3 жыл бұрын
That's what I prefer as well!
@georgekazanchyan49763 жыл бұрын
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.
@TheFinanceStoryteller3 жыл бұрын
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
@georgekazanchyan49763 жыл бұрын
@@TheFinanceStoryteller I really like your explanations and appreciate your videos! Thank you for providing real world experiences!
@TheFinanceStoryteller3 жыл бұрын
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
@Rosa-wk9yj3 жыл бұрын
So the lower the working capital the better?
@TheFinanceStoryteller3 жыл бұрын
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
@bensontam Жыл бұрын
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 Жыл бұрын
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).
@martinhernandez1691 Жыл бұрын
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 Жыл бұрын
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.
@damiendemalteris81954 жыл бұрын
The two asset categories in working capital?
@TheFinanceStoryteller4 жыл бұрын
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
@user-ll7ik2eb6p6 ай бұрын
Please explain me why too much high working capital is not good.
@TheFinanceStoryteller6 ай бұрын
Cash doesn't want to get stuck in the warehouse as inventory, or as an open invoice in accounts receivable. Cash wants to be cash, which the business can spend.
@KrishanSingh-gz9op3 жыл бұрын
Can we also express Deferred revenue in terms of days , like DIO, DSO & DPO?
@TheFinanceStoryteller3 жыл бұрын
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.
@SK-pv6xl3 жыл бұрын
Why do you subtract account receivables in the equation?
@TheFinanceStoryteller3 жыл бұрын
I don't..... Working capital (real world definition) = accounts receivable, plus inventory, minus accounts payable.
@QualitativeInvestor4 жыл бұрын
Philip, How changes in Working capital influence on Free Cash Flow?
@TheFinanceStoryteller4 жыл бұрын
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
@QualitativeInvestor4 жыл бұрын
@@TheFinanceStoryteller Thank you Phillip.
@dingding43584 жыл бұрын
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!
@TheFinanceStoryteller4 жыл бұрын
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
@isabellal34603 жыл бұрын
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.
@davidroldan60073 жыл бұрын
Why the cash and equivalents aren't consider in the working capital?
@TheFinanceStoryteller3 жыл бұрын
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.
@davidroldan60073 жыл бұрын
@@TheFinanceStoryteller Thanks for answering!!! You are one of that channels (very few) that answer the comments and help the people. I am a fan.
@TheFinanceStoryteller3 жыл бұрын
@@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!
@mmson96104 жыл бұрын
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
@TheFinanceStoryteller4 жыл бұрын
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!
@mauriciolopes8502 Жыл бұрын
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 Жыл бұрын
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.
@neha49094 жыл бұрын
Hii, is working capital part of capital (by proprietor) in day to day operation.
@TheFinanceStoryteller4 жыл бұрын
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
@neha49094 жыл бұрын
@@TheFinanceStoryteller awwww you so sweet replied to every comment. But what if when there will lot of comments.
@TheFinanceStoryteller4 жыл бұрын
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!
@neha49094 жыл бұрын
@@TheFinanceStoryteller that's good
@charlottepearson83 жыл бұрын
I love you
@TheFinanceStoryteller3 жыл бұрын
Thank you, Charlotte! 😘
@keshavkapoor45943 жыл бұрын
So working capital is not “all current assets (which includes cash) - all current liabilities” ??
@TheFinanceStoryteller3 жыл бұрын
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
@keshavkapoor45943 жыл бұрын
@@TheFinanceStoryteller thank you
@flavio___lira5 жыл бұрын
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!
@TheFinanceStoryteller5 жыл бұрын
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).
@AllStar42613 жыл бұрын
Dame Dash brought me here
@TheFinanceStoryteller3 жыл бұрын
Welcome! Enjoy the videos on this channel.
@QualitativeInvestor4 жыл бұрын
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.
@TheFinanceStoryteller4 жыл бұрын
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