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Working capital is usually defined to be the difference between current assets and current liabilities. However, we will modify that definition when we measure working capital for valuation purposes.
We will back out cash and investments in marketable securities from current assets. This is because cash, especially in large amounts, is invested by firms in treasury bills, short term government securities or commercial paper. While the return on these investments may be lower than what the firm may make on its real investments, they represent a fair return for riskless investments. Unlike inventory, accounts receivable and other current assets, cash then earns a fair return and should not be included in measures of working capital. Are there exceptions to this rule? When valuing a firm that has to maintain a large cash balance for day-to-day operations or a firm that operates in a market in a poorly developed banking system, you could consider the cash needed for operations as a part of working capital.
We will also back out all interest bearing debt � short term debt and the portion of long term debt that is due in the current period � from the current liabilities. This debt will be considered when computing cost of capital and it would be inappropriate to count it twice.
Will these changes increase or decrease working capital needs? The answer will vary across firms.
If you're running a business, you must have a working capital. Working capital is the measure of cash or liquid assets essential for its day-to-day operation. By calculating your working capital, you can find out the value of your current assets and if you are able to meet your financial obligations. It is simply the current assets in excess of current liabilities.
working capital can be worked out as current assets less current liabilities, net working capital is same as working capital both these terms are used interchangeably
How to calculate the capital comes from the study of the project cost and what they need, and on this basis determines the capital needed to activate the project, there is a difference between the fixed capital and the worker he can to increase working capital depending on the development and expansion of the project
