Computation of Working Capital for a Trading Concern

For examination purposes, working capital is computed in two common situations: (a) finding net working capital from a given list of current assets and current liabilities, and (b) estimating the working capital a trading concern will need for the coming period from estimates of stock, debtors, cash and creditors. Both are covered in the worked examples of this chapter; this section explains the method.

1. Net working capital from current assets and current liabilities. List and total all current assets to get gross working capital, list and total all current liabilities, and take the difference:

   Net Working Capital = Total Current Assets − Total Current Liabilities

   Items to include as current assets: closing stock, trade receivables (debtors + bills receivable), short-term investments, prepaid expenses, accrued income, and cash and bank balances. Items to include as current liabilities: trade payables (creditors + bills payable), outstanding expenses, short-term loans, bank overdraft, and provision for tax. Fixed assets, long-term loans, share capital and reserves are not part of this computation.
2. Estimating working capital for a trading concern. Here the firm forecasts the amount it will keep tied up in each current asset, and the amount of credit it will enjoy on each current liability, and takes the difference. A common approach bases each estimate on a period (a number of months or days) of the relevant annual figure:

The estimated working capital is then:

Estimated Working Capital = (Stock + Debtors + Cash) − Creditors …