Basically, the term ‘working’ is used to describe the manner in which something functions or operates.
In accounting, business, and finance, it is a term that is used in different ways. The article intends to explain the following usages of the term:
- Working-age population
- Working capital
- Working capital loan
- Working capital management
- Working capital turnover
- Working ratio
What is the working-age population?
The working-age population refers to the number of people, aged 15 – 64, in a country, region or economy that are capable and able to work. It includes employed and unemployed people.
It is an important concept in labour statistics, impacting the labour market in a country or economy if the working-age population changes considerably.
In South Africa, the working-age population was approximately 38 874 in the first quarter of 2025 (19 625 women and 19 249 men).
What is working capital?
Working capital, also referred to as net working capital (NWC), is the difference between the current assets and current liabilities of a company.
It is a measurement that determines whether a company has enough liquid assets to cover its short-term debt obligations. Liquid assets are assets that can be easily and quickly converted into cash. Short-term debt obligations are due within a period of 12 months.
Examples of current assets are, inter alia, accounts receivable, cash and cash equivalents, and inventory.
Current liabilities include items such as accounts payable, short-term loans, and income taxes owed.
The following formula is used as the standard formula to calculate working capital.
Working capital = Current assets – Current liabilities
For example, a company with current assets of R500 000 and current liabilities of R350 000 will report working capital of R150 000 (R500 000 – R350 000).
There are also alternative formulas available for the calculation of working capital, namely:
- Working capital = Current assets – Cash – Current liabilities (Cash is excluded from current assets.)
- Working capital = Accounts receivable + Inventory – Accounts payable. (In this formula, working capital comprises only the core items of the day-to-day operations of a company.)
Why is working capital important?
The positive working capital of a company is important because it is an indication of the financial health and solvency of the company in the short term. This implies that a company will be able to honour its short-term debt obligations and finance the growth of the business.
Conversely, a negative working capital (current liabilities exceed current assets) means that current assets are not used efficiently, eventually causing a liquidity crisis.
What is a working capital loan?
A working capital loan is a type of debt financing used by a company to increase its working capital, covering the company’s day-to-day expenses, such as:
- Wages.
- Debt service payments.
- Rent.
Furthermore, a working capital loan enables a business to, amongst others, finance activities such as:
- Sales.
- Marketing.
- Entering into bigger contracts.
- Research and development.
- Exploring new markets.
Advantages of working capital loans
- Generally, working capital loans are fast and easy to obtain, allowing businesses to tackle any immediate financial challenges.
- The fact that the owners of a business secured additional funds via debt financing means that they are not required to give up any equity, maintaining full control over the business.
- The loans are received in a lump sum, enabling a business to address various needs.
Disadvantages of working capital loans
- Compared to other types of debt financing, finance charges are high in order to compensate lenders for high risks.
- A working capital loan can be tied to a business owner’s personal credit, affecting his or her personal credit score if any payments are missed or if there is a default on the loan.
What is working capital management?
Working capital management refers to the business strategy applied by the management of a business, using its current assets, and monitoring its current liabilities to ensure that the business maintains sufficient cash flow for its short-term operations.
Aspects of working capital management
Typically, working capital management comprises the management of five main components of the working capital of a business, namely, liquidity management, inventory management, accounts receivable management, accounts payable management, and short-term debt management.
- Liquidity management is to ensure that a company has enough cash resources available to execute its daily operations and cover unforeseen needs. Low liquidity can affect the creditworthiness of a company.
- Inventory management is to make sure that a company maintains a sufficient level of inventory to meet the demand (ordinary and abnormal) for operations, without investing too much money in inventory.
In addition, the purpose of inventory management is to minimise the risk of unsold inventory and to prevent a shortage of inventory, causing lost sales for a company.
- Managing accounts receivable is to allow customers to buy on credit and to ensure that their payments are managed effectively.
Typically, the level of credit granted to a customer is based on the creditworthiness of a client, his/her financial strength, and the credit policy of the company.
- Simply put, accounts payable management entails the balancing between early and late payments.
Early payments may unnecessarily reduce the liquidity available, which could be more productively used in daily operations.
Contrarily, late payments may undermine a company’s reputation, relationship with suppliers, and its creditworthiness.
- Managing short-term debt is to ensure that a company has enough liquidity available to finance day-to-day operations without the possibility of excessive debt risk.
Proper short-term debt management entails the selection of the most suitable debt instruments as well as the amounts required.
Working capital management ratios
The purpose of working capital management is to use a company’s resources more efficiently. Enabling a company to satisfy this purpose, three ratios are used, namely the working capital ratio, the collection ratio, and the inventory turnover ratio.
- Working capital ratio
The working capital ratio, commonly known as the current ratio, is a metric that indicates a company’s ability to cover its short-term debt obligations. Generally, a ratio of below 1 is a signal that a company grapples with is short-term debt obligations.
The formula for the working capital ratio is:
Working capital ratio = Current assets/Current liabilities
- Collection ratio
The collection ratio, also called the average collection period or days sales outstanding (DSO) ratio, measures how effectively a company manages its accounts receivable, commonly referred to as receivables.
The ratio calculates the average number of days it takes a company to collect payment after goods were sold on credit to a customer. A low collection ratio is an indication that a company turns its receivables quickly and effectively into cash.
The formula for the calculation of the collection ratio is:
Collection ratio = Accounts receivable/Average daily sales
Where:
Average daily sales are the total of sales generated during a specific accounting period divided by the number of days. For instance, if the annual sales are R500 000, the average daily sales for the year are R1 369.86 (R500 000/365 days).
- Inventory turnover ratio
The inventory turnover ratio determines whether a company has enough inventory in stock to satisfy the needs of customers while avoiding overstocking that ties op working capital.
Calculation of the inventory turnover ratio is as follows:
Inventory turnover ratio = Cost of goods sold/Average inventory
Where:
Average inventory is the sum of the opening and closing balances of inventory of a specific accounting period, divided by 2.
What is working capital turnover?
Working capital turnover measures how efficiently a company uses its working capital to generate sales and to enhance growth.
Put differently, it is a ratio that calculates how many sales a company generates for every South African rand (ZAR) (or any currency for that matter) of working capital utilised. A higher working capital turnover ratio is preferable to a lower one.
The ratio is also called net sales to working capital.
The formula to determine working capital turnover is:
Working capital turnover = Net annual sales/Average working capital
Where:
- Net annual sales are a company’s gross sales minus sales returns, sales discounts, and sales allowances.
- Average working capital is average current assets less average current liabilities. The averages are calculated by respectively adding the opening and closing balances together and divide them by 2.
What is the working ratio?
The working ratio determines whether a company is able to recoup its operating costs from annual revenue.
The lower the ratio, the more profit a company generates. A ratio above 1 is an indication of a company’s inability to recover operating expenses, whereas a ratio below 1 means that a company is able to recover operating expenses.
To calculate the working ratio, the following formula is used:
Working ratio = (Total annual expenses – (Depreciation + Debt expenses))/Annual gross income
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