The Difference between Trade Working Capital and Total Working Capital
The Difference between Trade Working Capital and Total Working Capital
The details in the calculation of total and trade working capital are presented on the balance sheet. Investors and managers have to understand the meanings of the two in order to determine a company’s financial position. The calculations done for each form of working capital differs to some extent from that for the other. An organization uses both forms of WC to find out its financial shape at a given period of time.
Trade Working Capital
This represents the excess capital amount which a company has, and is worked out by subtracting the current liabilities from assets. Current assets include both cash and other resources, which can be converted into cash in one year’s time. Current liabilities include financial obligations which have to be settled in one year. Cash outflows decrease this form of working capital, whereas inflows increase it.
Total Working Capital
This represents all components which constitute a company’s current assets. One can calculate it by adding up cash, accounts receivable, marketable securities, prepaid expenses, and inventory. In some cases, it may not include the total components of assets. For instance, compensating balance, which a bank needs a company or customer to leave in their account always, is excluded from that company’s total cash.
