Working capital
The current assets and current liabilities a business runs on. Profitable firms still fail when the gap between paying and being paid is not funded.
Where you will meet it
Working capital appears in 23 learning outcomes on the CFA syllabus. A few of them:
- Explain why free cash flow to equity can serve as the basis of a valuation
“Free cash flow to equity is what could be paid to shareholders after operating expenses, interest, taxes, working capital and capital expenditure, and after net borrowing.”
- Tell apart cash flows from operating, investing and financing activities
“The indirect method starts from net income and reverses out non-cash charges and working capital movements, which is why depreciation is added back without any cash having moved.”
- Explain how firms manage working capital
“Working capital management is the handling of current assets and current liabilities so the firm can meet obligations as they fall due.”
- Contrast valuing a business by the free cash flow available to equity (FCFE) with valuing it by its free cash flow to the whole firm (FCFF)
“Free cash flow to the firm is the cash available to all providers of capital, debt and equity, after operating costs, taxes and investment in fixed and working capital.”
Practise it
Practise working capital until it is automatic: questions that explain every wrong option.
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