Seasonal Working Capital

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seasonal working capital
Working capital (also known as net working capital) is a financial metric that measures the day-to-day operating liquidity of a business.

It is defined as:

Current Operating Assets (Accounts Receivable + Inventory)

Minus: Current Operating Liabilities (Accounts Payable)

Equals: Net Working Capital.

Accounts Payable consist primarily of amounts owed to operating creditors, i.e., suppliers of inventory; amounts owed to service providers; and amounts owed to employees (payroll).

Operating creditors expect to be paid on a timely basis. If they are not, they may withhold further shipments or services.

During periods that precede or coincide with strong seasonal strong sales, a business may need to expand inventory and obtain extra services. But the operating creditors will likely not be willing to provide more goods and services without being paid for prior goods and services.

This describes a seasonal expansion of working capital, i.e., the growth in Accounts Payable is not sufficient to fund the growth in Accounts Receivable and Inventory. In this case, the business needs some source of financing to pay the operating creditors in a timely fashion.

Banks represent a common source of seasonal working capital financing. One type of such financing is a revolving line of credit, which expands with seasonal buildup of Accounts Receivable and Inventory and then contracts when, as the selling season passes, Inventory is sold (and converted to Accounts Receivable) and Accounts Receivable are converted into cash and the cash is used to repay the Revolving Line of Credit:

The bank line of credit is said to "revolve" because it increases and decreases during the year, according to the customer's need to borrow funds to pay operating creditors and the company's ability to convert Inventory and Accounts Receivable into cash and use the cash to repay borrowings.

permanent working capital growth
Permanent working...
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