Business Analysis with Microsoft® Excel, Second Edition

Broadening the Definition: Cash Versus Working Capital

So far, we have discussed funds in terms of cash only. A broader and more useful way of looking at the availability of funds involves the concept of working capital.

How does your company create income? If you manufacture a product, you use funds to purchase inventory, produce goods with that inventory, convert those goods into accounts receivable by selling them, and convert accounts receivable into cash when you receive payment. If yours is a merchandising firm, the process is basically the same, although you probably purchase finished goods rather than producing them.

Each of the components in this process is a current asset, such as an asset that you can convert into cash in a relatively ...