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Accounting for Non-Accountants, 9th Edition by David Horner

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11

Working capital management

Introduction

A business has two types of capital:

    •  fixed capital in the form of non-current assets, such as premises, machinery and equipment;

    •  working capital to fund the business operations over the short term.

Working capital consists of the current assets and the current liabilities of the business and is calculated as follows:

Working capital = Current assets (inventory, trade receivables and cash)

        less Current liabilities (trade payables and bank overdraft)

Current liabilities represent the short-term debts of the business which will require payment in the near future. Cash will be the medium by which these short-term debts will normally be repaid and settled, but having assets which are ...

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