Page 61 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Working capital A com-
rent assets are about twice
mon but theoretical way to
current liabilities, usually
measure the amount of 3-1), you’ll notice that cur-
ready liquidity of a company.To calcu- thought of as a pretty good
late it, deduct current assets from relationship to ensure that
current liabilities.Also called net work- the cash will be available
ing capital. For example,Wonder when needed. You’ll read
Widget’s current assets total more about that relation-
$1,667,000 and its current liabilities
total $819,000.Thus it has net work- ship in Chapter 7, when we
ing capital of $848,000. discuss critical perform-
ance factors.
Accounts Payable
This is the account that includes all the bills yet unpaid from all
the suppliers and service providers. This is usually the largest
item among a company’s current liabilities. Accounts payable is
usually the first item listed under current liabilities.
Amounts in this category should be paid in accordance with
trade terms printed on the invoices, typically 30 days, or what-
ever other payment period was granted by the supplier.
Sometimes companies take longer to pay their bills than the
official period, as noted above for accounts receivable. In such
cases, customers are, in essence, borrowing money from their
trade creditors to help increase the amount of financial
resources that are at work in their company. This is called lever-
age, and we’ll bring this up
again in Chapter 5 and in
Leverage The ability to
put more money into a discussing ratios in
business than has been Chapter 7. When Wonder
invested by its owners and thus earn Widget extends its pay-
more than its invested capital could ment period by delaying
earn alone. payments to its creditors,
it’s benefiting from the use
of leverage. When its customers do the same thing to it, Wonder
Widget’s accounts receivable take longer to collect and it’s on
the wrong side of that leverage.