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Understand Working Capital.
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Working Capital Adjustments Part 1
Understand working capital adjustments.
When to use
When constructing a basic financial model.
- Current assets minus current liabilities
- Working capital measures how much in liquid assets a company has available to build its business
- Analysts will often only consider trade receivables, trade payables and inventory
- The number can be positive or negative
- The aim is to make this cycle as short as possible:
The below diagram shows the process of receiving the cash based on a credit sale of $1,000 and calculates the ‘Days receivable’ ratio:
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