Working capital cycle AO2
AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest
The accounting definition of working capital is:
Working capital = Current assets - current liabilities
Stock + debtors + cash minus Creditors + overdrafts + short-term loans
There is, in most businesses, a significant delay between paying out for the raw materials and labour required to produce the goods or services and the receipt of cash from the sale of the goods/services. This means that for most businesses their working capital (their net current assets) needs to be very carefully managed.
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