Types of Working Capital

Types of Working Capital

Working capital is a term that refers to the money and valuable assets that a business has on hand to operate, and it can be categorized as either tangible or intangible. “Below is an explanation of each type, followed by some examples of companies with solid working capital.

1. Tangible Working Capital

The following tangible assets are cash, receivables inventories, and other financial assets designated as current assets in the company’s accounting records. Actual working capital also encompasses fixed assets such as buildings, equipment, vehicles, and leasehold improvements.

Types of Working Capital

2. Intangible Working Capital

Intangible working capital comprises accounts receivable, goodwill, trademarks, and patents. Intangibles are not found on the balance sheet in the form of notes or assets; they are present only in intangible assets such as copyrights, trade secrets, operating systems, and office furniture. Unlike tangible assets, intangibles have no fixed value. In addition to these assets, intellectual property such as brand name recognition or customer loyalty can also contribute to a company’s intangible working capital.

Tangible and intangible working capital can be used to run a business and can generally be classified as current or non-current assets. However, different considerations depend on the nature of the assets. It is important to note that tangible working capital is helpful since it covers cash, inventory, receivables, and fixed assets that a company will use to operate its business. In this regard, intangible working capital can be considered an addition for accounting purposes since it shows assets that cannot be seen on the balance sheet. In this regard, tangible working capital can be viewed as an addition for accounting purposes since it shows assets that cannot be seen on the balance sheet.

An advantage of intangible working capital is that it shows a company’s ability to generate cash in the future since it uses a brand’s future profits and growth potential to purchase intangible assets such as goodwill and trademarks. It creates future profits and increases long-term shareholder value while providing a positive company investment return.

Intangible working capital is essential since it helps to increase cash and cash equivalents while providing future returns. This allows the company to cover short-term liabilities. Intangible working capital can be considered an addition for accounting purposes since it shows assets that cannot be seen on the balance sheet.

Intangible working capital can also help a company operate smoothly with less debt and reduce administrative costs, increasing long-term shareholder value. Therefore, a company must consider not only their tangible working capital but also their intangible working capital to improve the level of profits, efficiency, and overall performance of their business operations.

Tangible working capital can also be liquid working capital and is used to measure the amount of money a company has on hand to operate. Intangible working capital can be referred to as cash and cash equivalents. In this regard, tangible working capital gives an overall picture of how a company is doing financially instead of intangible working capital, which provides insight into how the business will do in the future. A company’s intangible working capital indicates how well it will do in the future and its cash and cash equivalents show how well it is doing currently. Tangible working capital consists of the following.

Types of Working Capital

3. Cash and Cash Equivalents

Cash and equivalents can be used for operating expenses and purchasing operating assets. It is not considered an investment or a liability because it does not affect ownership rights or title to the property. This can include money from checking accounts, savings accounts, money market accounts, certificates of deposit, stocks, bonds, and cash. The balance sheet may change if a company uses this working capital for financing or investing. However, if the money is used for operations, then there will be no impact on the balance sheet.