What Are Working Capital Costs?
Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into account two different factors: the company’s short-term debt position and the current portion of long-term debt — which is generally the portion of debt due within the next 12 months. Both types of costs can be found on the company’s balance sheet in the current liabilities section.
Which Items Are Included in Working Capital Costs?
Most companies have at least two types of accounts in the current liabilities section of their balance sheets: accounts payable and salary/wages payable. Beyond those, the specific items classified as current liabilities vary across companies and sectors as they are more dependent on which daily activities are core to the business.
For example, in the manufacturing sector, WCC is often described as the costs associated with converting raw materials to finished product. Significant portions of a manufacturer’s operating budget can be attributed to the purchase and storage of raw materials. A software company, on the other hand, might have larger portions of its current liabilities dominated by research and development (R&D) costs and marketing.
Measuring Working Capital for Liquidity Purposes
Working capital (WC) measures the company’s ability to fund day-to-day operations from its most liquid assets. Calculated as the difference between a company’s current assets and its current liabilities, WC is among the most common financial metrics used to decipher whether a company has sufficient liquidity available to meet its short-term requirements.
Companies whose current assets exceed their current liabilities are said to have positive WC, while those whose current liabilities exceed their current assets are said to have negative WC.
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