Working Capital

• Working capital, also known as net working capital

(NWC), is the difference between a company’s
current assets—such as cash, accounts
receivable/customers’ unpaid bills, and inventories
of raw materials and finished goods—and its current
liabilities, such as accounts payable and debts.
• NWC is a measure of a company’s liquidity,
operational efficiency, and short-term financial
health. If a company has substantial positive NWC,
then it should have the potential to invest and grow.
If a company’s current assets do not exceed its
current liabilities, then it may have trouble growing
or paying back creditors. It might even go bankrupt.
Working capital, also called net working capital
(NWC), represents the difference between a
company’s current assets and current liabilities.

NWC is a measure of a company’s liquidity and

short-term financial health.

A company has negative NWC if its ratio of

current assets to liabilities is less than one.

Positive NWC indicates that a company can fund

its current operations and invest in future
activities and growth.

High NWC isn’t always a good thing. It might

indicate that the business has too much
inventory or is not investing its excess cash.
NWC estimates are derived from the array of assets and
liabilities on a corporate balance sheet.

Current assets listed include cash, accounts receivable,

inventory, and other assets that are expected to be
liquidated or turned into cash in less than one year.

Current liabilities include accounts payable, wages, taxes

payable, and the current portion of long-term debt that’s
due within one year.

Positive NWC indicates that a company can fund its current

operations and invest in future activities and growth.

NWC that is in line with or higher than the industry average

for a company of comparable size is generally considered
acceptable. Low NWC may indicate a risk of distress or
default.
What Is Capital

Capital is a broad term that can describe any thing that confers value or benefit to its owner,
such as a factory and its machinery, intellectual property like patents, or the financial assets of
a business or an individual. While money itself may be construed as capital is, capital is more
often associated with cash that is being put to work for productive or investment purposes.

In general, capital is a critical component of running a business from day to day and financing
its future growth. Business capital may derive from the operations of the business or be raised
from debt or equity financing. When budgeting, businesses of all kinds typically focus on
three types of capital: working capital, equity capital, and debt capital. A business in the
financial industry identifies trading capital as a fourth component.
The capital of a business is the money it has available to pay for its day-to-day operations and to
fund its future growth.

The four major types of capital include working capital, debt, equity, and trading capital. Trading
capital is used by brokerages and other financial institutions.

Any debt capital is offset by a debt liability on the balance sheet.

The capital structure of a company determines what mix of these types of capital it uses to fund its
business.

Economists look at the capital of a family, a business, or an entire economy to evaluate how
efficiently it is using its resources.
How Capital Is Used

Capital is used by companies to pay for the ongoing production of goods and
services in order to create profit. Companies use their capital to invest in all
kinds of things for the purpose of creating value. Labor and building
expansions are two common areas of capital allocation. By investing capital, a
business or individual seeks to earn a higher return than the capital's costs.

At the national and global levels, financial capital is analyzed by economists to

understand how it is influencing economic growth. Economists watch several
metrics of capital including personal income and personal consumption from
the Commerce Department’s Personal Income and Outlays reports. Capital
investment also can be found in the quarterly Gross Domestic Product report.
• Typically, business capital and financial capital are
judged from the perspective of a company’s capital
structure. In the U.S., banks are required to hold a
minimum amount of capital as a risk mitigation
requirement (sometimes called economic capital) as
directed by the central banks and banking regulations.
• Other private companies are responsible for assessing
their own capital thresholds, capital assets, and capital
needs for corporate investment. Most of the financial
capital analysis for businesses is done by closely
analyzing the balance sheet.
 • A company’s balance sheet provides for metric
analysis of a capital structure, which is split among
assets, liabilities, and equity. The mix defines the
structure.

Business • Debt financing represents a cash capital asset that

must be repaid over time through scheduled
Capital liabilities. Equity financing, meaning the sale of
stock shares, provides cash capital that is also
Structure reported in the equity portion of the balance sheet.
Debt capital typically comes with lower rates of
return and strict provisions for repayment.
• Some of the key metrics for analyzing business
capital are weighted average cost of capital, debt to
equity, debt to capital, and return on equity.
Types of Capital

Debt Capital

Equity Capital

Working Capital

Trading Capital
 Equity capital can come in several forms. Typically, distinctions are
made between private equity, public equity, and real estate equity.

Equity Private and public equity will usually be structured in the form of
shares of stock in the company. The only distinction here is that
public equity is raised by listing the company's shares on a stock

Capital exchange while private equity is raised among a closed group of

investors.

When an individual investor buys shares of stock, he or she is

providing equity capital to a company. The biggest splashes in the
world of raising equity capital come, of course, when a company
launches an initial public offering (IPO). In 2020, new issues
appeared from young companies including Palantir, DoorDash, and
Airbnb
 • A business can acquire capital by borrowing. This is debt capital, and it
can be obtained through private or government sources. For established
companies, this most often means borrowing from banks and other
financial institutions or issuing bonds. For small businesses starting on a
shoestring, sources of capital may include friends and family, online
lenders, credit card companies, and federal loan programs.
• Like individuals, businesses must have an active credit history to obtain
debt capital. Debt capital requires regular repayment with interest. The
Debt Capital interest rates vary depending on the type of capital obtained and the
borrower’s credit history.
• Individuals quite rightly see debt as a burden, but businesses see it as an
opportunity, at least if the debt doesn't get out of hand. It is the only way
that most businesses can obtain a large enough lump sum to pay for a
major investment in its future. But both businesses and their potential
investors need to keep an eye on the debt to capital ratio to avoid getting
in too deep.
• Issuing bonds is a favorite way for corporations to raise debt capital,
especially when prevailing interest rates are low, making it cheaper to
borrow. In 2020, for example, corporate bond issuance by U.S. companies
soared 70% year over year, according to Moody's Analytics. Average
corporate bond yields had then hit a multi-year low of about 2.3%
 A company's working capital is its liquid capital assets available for
fulfilling daily obligations. It is calculated through the following two
assessments:

Working Current Assets – Current Liabilities

Capital Accounts Receivable + Inventory – Accounts Payable

Working capital measures a company's short-term liquidity. More

specifically, it represents its ability to cover its debts, accounts
payable, and other obligations that are due within one year.

Note that working capital is defined as current assets minus its

current liabilities. A company that has more liabilities than assets
could soon run short of working capital.
 Trading Capital

• Any business needs a substantial amount of capital in order to operate and create profitable returns. Balance
sheet analysis is central to the review and assessment of business capital.

• Trading capital is a term used by brokerages and other financial institutions that place a large number of trades
on a daily basis. Trading capital is the amount of money allotted to an individual or the firm to buy and sell
various securities.

• Investors may attempt to add to their trading capital by employing a variety of trade optimization methods.
These methods attempt to make the best use of capital by determining the ideal percentage of funds to invest
with each trade.

• In particular, to be successful, it is important for traders to determine the optimal cash reserves required for
their investing strategies.

• A big brokerage firm like Charles Schwab or Fidelity Investments will allocate considerable trading capital to each
of the professionals who trade stocks and other assets for it.
Negotiable Instrument

• A negotiable instrument is a signed

document that promises a sum of payment
to a specified person or the assignee.
• In other words, A transferable, signed
document that promises to pay the bearer
a sum of money at a future date or on-
demand. The payee, who is the person
receiving the payment, must be named or
otherwise indicated on the instrument.
• Because they are transferable and
assignable, some negotiable instruments
may trade on a secondary market.
• A negotiable instrument is a signed
document that promises a sum of
payment to a specified person or the
assignee.
• Negotiable instruments are
transferable in nature, allowing the
holder to take the funds as cash or use
them in a manner appropriate for the
transaction or according to their
preference.
• Common examples of negotiable
instruments include checks, money
orders, and promissory notes.
• Negotiable instruments are transferable in nature, allowing the holder
to take the funds as cash or use them in a manner appropriate for the
transaction or according to their preference.
• The fund amount listed on the document includes a notation as to the
specific amount promised and must be paid in full either on-demand
or at a specified time.
• A negotiable instrument can be transferred from one person to
another. Once the instrument is transferred, the holder obtains a full
legal title to the instrument.
• A negotiable instrument is a
document that guarantees
payment of a specific amount of
money to a specified person (the
payee). It requires payment
either upon demand or at a set
time and is structured like a
contract.
• The term “negotiable” in a negotiable instrument refers to the fact that they are
transferable to different parties. If it is transferred, the new holder obtains the full
legal title to it.

• Non-negotiable instruments, on the other hand, are set in stone and cannot be
altered in any way.

• Negotiable instruments enable its holders to either take the funds in cash or
transfer to another person. The exact amount that the payor is promising to pay is
indicated on the negotiable instrument and must be paid on demand or at a
specified date. Like contracts, negotiable instruments are signed by the issuer of
the document.
Promissory notes

• Promissory notes are documents containing a written promise between parties

– one party (the payor) is promising to pay the other party (the payee) a
specified amount of money at a certain date in the future. Like other negotiable
instruments, promissory notes contain all the relevant information for the
promise, such as the specified principal amount, interest rate, term length, date
of issuance, and signature of the payor.
• The promissory note primarily enables individuals or corporations to obtain
financing from a source other than a bank or financial institution. Those who
issue a promissory note become lenders.
• While promissory notes are not as informal as an IOU, which merely indicates
that there is a debt, it is not as formal and rigid as a loan contract, which is more
detailed and lists out the consequences if the note is not paid and other effects.
Cheques

• Cheques are perhaps the most common

negotiable instrument example. This is
an instrument in writing with a specific
payment amount. Upon receipt, the
payer’s financial institution pays out
these funds to the bearer, either in cash
or to a chosen bank account. Cheques
are used to pay many different types of
bills, from loans to university fees and
rent. They’re being phased out in favour
of online banking transactions, but
cheques still provide a helpful paper trail
for businesses.
Bills of exchange

• Used in transactions related to

both goods and services, bills of
exchange are legally binding
documents. They instruct one party
to pay a predetermined sum to a
secondary party. The payer signs
the bill of exchange, creating a
written contract of payment. When
issued by a financial institution, a
bill of exchange is often called a
bank draft. When issued by an
individual, it’s called a trade draft.
Promissory notes

• When a promissory note is issued, it

shows the amount owed together with
the date of payment and interest rate. Like
other negotiable instruments, they are
written documents showing the promise
of payment between a payer and payee.
The document contains all relevant
information, including interest rate,
principal amount, date of issue, and payer
signature. The benefit of a promissory
note is that it enables businesses to obtain
financing from sources outside of official
financial institutions.