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What turns into cash within the month less what must be paid within it, and the cover that is left once the stock is taken out.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will list what a business has that turns into cash within the month and what it must pay within it, subtract to find its working capital, and then take the stock out to say whether the month can be paid for if nothing on the shelf sells.
You can count the days a purchase ties up cash. Working capital asks the next question: while that money is out, does the business have enough else to pay what falls due? You need only addition and subtraction, and the habit from the last lesson of asking when money actually moves. What is new is drawing a line around the month ahead and asking which of the business's money is inside it.
| Term | What it means |
|---|---|
| Near-term | Within the period being looked at — here, the month ahead. |
| Working capital | What turns into cash within the month less what must be paid within it. |
| Cover without stock | The same subtraction with the stock left out. |
| Current assets | The accountant's name for what turns into cash within a year. |
| Current liabilities | The accountant's name for what must be paid within a year. |
| Long-term asset | Something the business keeps and uses for years, such as a machine or a van. |
Stand at the start of the month and list two things. What does the business have that will be cash before the month is out? Cash already in the account, invoices customers will pay this month, and stock that will be sold. What must it pay before the month is out? Supplier bills falling due, rent, wages, an installment.
$$\text{working capital} = \text{what turns into cash} - \text{what must be paid}$$
Above zero, the business has room: it can pay what is due and still have something left while slower money arrives. Below zero, the month's payments are bigger than everything it can lay its hands on, and something has to give.
Then take the stock out. Cash pays a bill today, and an invoice pays one on the day the customer pays. Stock pays nothing until somebody buys it. So the second figure is
$$\text{cover without stock} = \text{cash} + \text{invoices due} - \text{what must be paid}$$
and it is the one that says whether the month is safe if the shelves are slow. Accountants draw the same line around a year rather than a month and call the two sides current assets and current liabilities; the idea is the same.
Another way: steps
Another way: table
Two shops on the same morning, in dollars.
| Shop A | Shop B | |
|---|---|---|
| Cash | 2000 | 300 |
| Invoices due this month | 1000 | 500 |
| Stock at cost | 500 | 3200 |
| Must pay this month | 2500 | 2500 |
| Working capital | 1000 | 1500 |
| Cover without stock | 500 | −1700 |
Shop B has the larger working capital and is the one in trouble: 1700 dollars of its stock has to sell, this month, before its bills can be paid.
Draw the line first. Decide the period — usually the month ahead — and hold to it. Every item is then either inside the line or outside it, and an item that is half in, like a loan, is split: this month's installment is inside, the rest outside.
List what turns into cash. Cash in the account; invoices that customers will pay inside the month, judged by when they actually pay, not by the date on the invoice; stock that will be sold inside the month, at what it cost.
List what must be paid. Supplier bills that fall due, rent, wages, tax payments, loan and lease installments. Only those falling inside the line.
Subtract, then subtract again. The working capital first; then the same subtraction without the stock. Write both down, because they answer different questions: the first says how much room there is on paper, the second whether the month survives if nothing sells.
Check the sheet by adding back: the cover without stock plus the stock should equal the working capital. Then read every line against the calendar: an invoice from a customer who always pays late does not belong inside this month, whatever its terms say.
Working capital changes only when money crosses the line around it. Many everyday transactions move money between two lines inside it and leave the total exactly where it was.
Buying stock on credit adds stock on one side and a bill on the other: no change. Paying a bill from cash takes the same amount off cash and off what is owed: no change. Collecting an invoice turns money owed into cash: no change. Selling stock at a profit does change it, by the profit, because the stock went out at cost and more cash came in.
What lowers it is money leaving the line: buying a machine or a van with cash, repaying the part of a loan that was not due this month, the owner taking money out. What raises it is money arriving from outside: a loan received, the owner putting money in, a sale of old equipment.
This is why a business can feel poorer after buying a van it can well afford. The van is real and useful; it simply sits outside the line, and the cash that paid for it no longer pays this month's bills.
Most small businesses have a season. A garden spends in spring and is paid in summer; a gift shop buys in autumn and sells in December; a café is busy in winter and quiet in August. Working capital moves with the season, and the month to worry about is rarely the one with the smallest profit. It is the one where the most has been paid out and the least has come back.
Working out the figure for each month of the year ahead, not only this one, shows where the low point falls. A business that knows its cover will dip below zero in April can arrange a line of credit in February, ask a supplier for longer terms before the spring order, or hold back a planned purchase until May. Arranged in advance, each of those is cheap; discovered in April, each is expensive or unavailable.
The working capital and the cover without stock make four combinations, and each one calls for a different response.
Both above zero. The month can be paid from cash and money already on its way, and the stock is extra room. Nothing needs to be done beyond watching that the invoices really arrive.
Working capital above zero, cover below. The month can be paid only if some stock sells in time. The shortfall in the cover is the amount of stock that has to turn into cash, and the question is whether it will, and before which payment. This is the most common position for a shop and the one most often misread as safe.
Both below zero. Even selling everything on the shelf would not pay the month. Something from outside the line is needed — a loan, the owner's money, a payment delayed by agreement — and it is needed before the first bill falls due, not after.
Working capital below zero, cover higher. This cannot happen: the cover is the working capital with the stock taken off, so it is never the larger of the two unless the stock is negative, which it cannot be. If a sheet shows it, a line has been put on the wrong side.
Writing the combination down beside the two numbers — room on paper, but 400 of stock must sell before the 20th — turns a sheet of figures into a sentence someone can act on.
A gift shop's owner draws up her working capital on the first of October. She has 4,000 dollars in the bank, no invoices owed (her customers pay at the register), and 3,000 of stock. This month she must pay 2,500 of rent and wages, and she wants to place her Christmas order: 12,000 of stock from two wholesalers.
Today her working capital is 4,000 + 3,000 − 2,500 = 4,500, and her cover without stock is 4,000 − 2,500 = 1,500. Placing the order on payment with order would take 12,000 of cash she does not have. So she asks the wholesalers for terms. One gives sixty days, the other thirty.
With the order on credit, working capital does not change — 12,000 of stock arrives and 12,000 is owed — but the cover without stock does. The thirty-day half, 6,000, falls due in November, before most of the Christmas trade. November's cover is her cash after October, about 1,500 plus October's takings of 5,000, less November's rent and wages of 2,500 and the 6,000: −2,000. So 2,000 of Christmas stock has to sell in November before that bill can be paid, and she arranges a 3,000 line of credit in October, while the bank can see a healthy working capital, in case November is slow.
The sixty-day half falls due in December, when the shop is at its busiest. The same order, split between two sets of terms, turns a risky autumn into a manageable one.
Banks and trade suppliers look at a business's current assets against its current liabilities before lending or giving credit, and many also look at the same figure without stock, which they call the quick or acid-test position. It is the cover without stock under another name, and they look at it for the same reason: stock is the slowest thing on the list to turn into money.
Working capital is profit. Profit is about a period that has happened; working capital is about payments that are coming. A profitable business that spent its cash on a van can have none.
Everything the business owns counts. A machine, a van or a lease deposit will not be turned into cash this month, so it cannot pay this month's bills.
Everything it owes counts. A loan paid off over five years belongs in the month only as this month's installment.
Positive means safe. Not if it is mostly stock. The cover without stock is the figure that survives a slow month.
Paying a bill improves it. Paying a bill from cash lowers both sides by the same amount; the working capital does not move.
Add what turns into cash: cash 600, invoices 900, seedlings 700.
$600 + 900 + 700 = 2200$
Three lines on the side of what it has.
Add what must be paid: seed merchant 800, polytunnel lease 900.
$800 + 900 = 1700$
Only what falls due this month.
Subtract for the working capital.
$2200 - 1700 = 500$
Room on paper.
Leave the seedlings out for the cover.
$600 + 900 - 1700 = -200$
Without selling stock, the month is 200 short.
Check by adding the stock back.
$-200 + 700 = 500$
The cover plus the stock is the working capital.
Start the week at a working capital of 3,000.
$3000$
From Monday's sheet.
Buy 400 of beans on thirty days' credit.
$+400 \text{ stock}, \ +400 \text{ owed} \Rightarrow 3000$
Both sides rise together.
Pay the milk bill of 250 from cash.
$-250 \text{ cash}, \ -250 \text{ owed} \Rightarrow 3000$
Both sides fall together.
Collect Studio 5's invoice of 600.
$+600 \text{ cash}, \ -600 \text{ invoices} \Rightarrow 3000$
Money changes form inside the line.
Buy a new grinder for 900 in cash.
$3000 - 900 = 2100$
Cash leaves the line for something used for years.
Read the week.
$\text{only the grinder moved it}$
Four transactions, one change.
Add what turns into cash: cash 800, invoices 1,500, stock 2,200.
$800 + 1500 + 2200 = 4500$
What the shop has.
Add what must be paid: suppliers 1,900, van 600.
$1900 + 600 = 2500$
What falls due this month.
Subtract for the working capital.
$4500 - 2500 = 2000$
Healthy on paper.
Leave the stock out for the cover.
$800 + 1500 - 2500 = -200$
Two hundred short if no screen is used on a paid job.
Find the stock that must turn into cash.
$200$
About a tenth of what is on the shelf.
Check whether the corporate invoices will really arrive.
$1500 \text{ due from clients who pay late}$
If half of it slips, the shortfall is 950, not 200.
Read the risk.
$-200 - 750 = -950$
The cover depends on the late payers as much as on the shelves.
Add what turns into cash.
$800 + 400 + 900 = 2100$
Three lines.
Subtract what must be paid.
$2100 - 1500 = 600$
The working capital.
Leave the stock out.
Corner Bean on the first of the month, in dollars. Fill in the two totals, the working capital, and the cover the business has if not one item of stock sells this month. Write a figure below zero with a minus sign.
| Dollars | |
|---|---|
| Cash in the account | 500 |
| Invoices customers will pay this month | 400 |
| Stock at cost | 700 |
| Total that turns into cash this month | |
| Supplier bills due this month | 1100 |
| the rent on the fifteenth | 800 |
| Total that must be paid this month | |
| Working capital | |
| Cover if no stock sells |
Complete the worked solution: a shop has $1700$ dollars in the bank, $300$ dollars of invoices due this month and $200$ dollars of stock at cost. It must pay $1100$ dollars to suppliers and $400$ dollars of rent this month. Find its working capital and its cover without stock.
Add what turns into cash this month.
$1700 + 300 + 200 =$ a
Cash, invoices due and stock.
Add what must be paid this month.
$1100 + 400 =$ o
Only what falls due within the month.
Subtract to find the working capital.
$(\text{has}) - (\text{must pay}) =$ w
The room the business has.
Leave the stock out for the cover.
$(\text{working capital}) - 200 =$ n
Stock pays nobody until it is sold.
Read which figure decides the month.
$\text{the cover without stock}$
It is the one that survives a slow month.
A bakery has $400$ dollars in the bank, $1100$ dollars of invoices that cafés will pay this month, and $900$ dollars of flour, butter and packaging at cost. This month it must pay $1300$ dollars to its suppliers and $300$ dollars of rent. What is its working capital, in dollars?
Answer:
Corner Bean is working out its working capital for the month ahead. Sort each item.
| Turns into cash within the month | Must be paid within the month | Outside this month's working capital | |
|---|---|---|---|
| $475$ dollars in the business account | |||
| Studio 5's invoice, due in twelve days | |||
| Coffee beans on the shelf | |||
| The roaster's bill of $593$ dollars, due on the twentieth | |||
| Rent due on the fifteenth | |||
| The espresso machine | |||
| The last payment on the fit-out loan, in three years |
Fixit Mobile starts the week with working capital of $5900$ dollars. During the week Dan buys $400$ dollars of screens on thirty days' credit, pays a $800$ dollar supplier bill early out of cash, spends $600$ dollars of cash on a soldering station, and collects a $400$ dollar invoice from a customer. What is the working capital at the end of the week, in dollars?
Answer:
A florist has $800$ dollars in the account, $200$ dollars of wedding invoices that will be paid this month, and $2000$ dollars of flowers and sundries in stock at cost. Payments of $1500$ dollars fall due this month. Stock sold this month turns into cash within it. For what values of stock sold, in dollars at cost, can the florist pay everything due?
This task has no paper form; do it on a device.
A plumber's business on the first of the month: $1000$ dollars in the account, $1800$ dollars owed by customers this month, and $800$ dollars of boilers and fittings in the van. It must pay $2200$ dollars to the merchant and $800$ dollars for the van lease this month. Fill in the sheet, in dollars.
| Amount | |
|---|---|
| What turns into cash this month | |
| What must be paid this month | |
| Working capital | |
| Cover without stock | |
| Stock that must turn into cash first |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Corner Bean has $500$ dollars in the account, $400$ dollars of invoices customers will pay this month and $700$ dollars of stock at cost. This month it must pay $1100$ dollars to suppliers and $800$ dollars for the rent on the fifteenth. If no stock sells at all this month, how many dollars are left once everything due is paid? Write a shortfall with a minus sign.
Answer:
You can work out working capital and the cover without stock, and say which one decides whether the month is safe. Tell someone why a business with more working capital than its neighbor can still be the one that misses a payment. Next: the invoices customers have not paid yet.
15. Your turn: cash 800, invoices due 400, stock 900, payments due 1500, step 3
$800 + 400 - 1500 = -300$
Three hundred of stock has to sell first.