Difference Between Working Capital and Equity
A company's chief executive officer often relies on department heads, segment leaders and a coterie of financial advisers to figure out the best way to manage working capital, raise equity and rein in waste. Advisers such as investment bankers and management consultants help the CEO formulate sound financial management procedures and think about broad policy items, especially with short-term financing and long-term budgeting.
Working capital equals short-term assets minus short-term liabilities. In a financial glossary, the concepts "short term" and "long term" refer to 12 months or fewer and more than one year, respectively. Short-term assets include resources a business uses to make money, settle financial commitments and run efficient activities. Examples include cash, customer receivables -- which is money a business expects after delivering goods or performing services -- prepaid insurance, merchandise and refunds due. Short-term debts include accounts payable, taxes due and salaries. Working capital is a solvency ratio that helps investors figure out whether a company will have enough cash to operate in the next 365 days.
Equity -- also known as shareholders' equity, investors' capital or owners' equity -- represents money investors pour into a company's activities. Financiers do so by buying shares on financial markets as diverse as the Chicago Mercantile Exchange, the New York Stock Exchange and the London Stock Exchange. Equity holders -- those who bought a company's stocks -- receive periodic dividends and make extra cash when share values rise on financial exchanges. In a financial glossary, "financial market," "financial exchange," "capital market" and "securities exchange" mean the same thing. Besides investors' money, other equity items include stock repurchases and retained earnings -- also known as undistributed profits or accumulated revenues.
While working capital and equity are different items, they interrelate in the way corporate leadership analyzes internal processes and sets a sound financial management culture. From an accounting standpoint, working capital aligns with equity because total total assets minus total debts -- see how close this is to the working-capital formula -- equal net worth, also called equity. Working capital components and equity are integral to a statement of financial position, the accounting synopsis financial managers often call a balance sheet or report on financial condition. From a fundraising perspective, working capital management and equity review help department heads calculate how much cash is in corporate coffers, determine whether it's sufficient to operate and figure out the best way to raise short-term money.
Besides a balance sheet, equity and working-capital transactions affect other financial statements. Equity is part of the statement of changes in shareholders' equity, and interest payments -- that may arise from short-term debt arrangements -- flow into an income statement.