Working capital is the arithmetic discrepancy between current assets and current liabilities

Working capital is the arithmetic discrepancy between current assets and current liabilities. Current assets are items which are held by a business with the goal of converting them into money within the near future, whereas current liabilities are short-term obligations which are likely to be paid within one year (Hill, 2013). Current assets consist of stocks, debtors, bank, short-term investments, prepayments and cash, while current liabilities include creditors, accruals, short-term borrowings and others creditors within one year. It is very crucial for businesses to have positive working capital otherwise it will indicate liquidity problems. Very often, those companies which have large working capital are likely to do well since they can enlarge and improve their activities. The main objective of working capital is to make sure that businesses are capable to carry on their operations and they have sufficient cash flow available to cover their short-term obligations and future operating expenses. Good management of working capital generates cash and it assists in decreasing risk and getting more profits (Pike and Neal, 2009). For this research project, the researcher is going to focus on one of the main elements of working capital that is stock, which is often the most material item.
Nowadays, the British term ‘Stock’ and American term ‘Inventory’ is being used interchangeably. However, they could mean two different things. Waters (2003, p.4) states that “stock consists of all the goods and materials stored by an organization”, while “inventory is a list of the items held in stock”. For the purposes of this research project these terms are going to be used interchangeably.