What is the significance of "working capital"?

Question

It appears that "working capital" is the difference between current assets and current liabilities.
What is the real significance of this? What is the significance of "changes in working capital"? I can easily find a definition for this online, but need a more intuitive understanding.
For example:
"The purchase price for all the businesses acquired was $186.0 million, including transaction costs and an adjustment relating to working capital in the three months ended June 30, 2006."

What does the purchase price of an asset have to do with changes to working capital?

Im a little slow on this, and need a clearer explanation.
Thanks for any help!

More confusing stuff:
"The purchase price for all the businesses acquired from was $186 million, including transaction costs and a $4.2 million purchase price adjustment in the second quarter relating to the final working capital determination."

As a further question, BUD has always run a *negative* working captial...Why would they do this?
Thanks

Answer 1

Working capital is, essentially, the money that you have tied up in business. While one definition of Working Capital is Current Assets minus Current Liabilities -- acounts like cash and short term investments should be excluded.

Think about it this way -- if you were to liquidate everything, how much cash would you get-- that is Working Capital. The three main components are Accounts Receivable, Accounts Payable and Inventory. Your assets then are the amount of money that is owed to you plus the value of goods you haven't sold yet. But you may have bought on credit -- so your accounts payable have to be subtracted.

In valuing a firm, we care about the cash flows coming in or going out. The change in working capital will be the flow that gets added to working capital. For example, if you are able to make your inventory more efficient -- then you can turn inventory into a positive cash flow. If you can get people to pay you faster, you cut down on A/R and get more cash flow. On the other hand, if you cut down on A/P, then that is a negative flow.

Answer 2

Significance Of Working Capital

Answer 3

Working capital is a measure of short term liquidity and operating efficiency of a firm. Its the net cash and other assets that can be converted to cash in the short term, or one accounting cycle. So an increase in working capital could increase the value of a firm. Working capital consists of current assets such as cash, accounts recieveable and inventory. An increase in working capital means a company is more efficient in collecting debts. The optimal level of working capital depends on the business. and other firms in the industry. Companies that can make or buy inventory quckly and turn it over quickly such as grocery stores have lower working capital needs. Companies with longer opearting cycles such as manufacturing generally need larger amounts of working capital. Some companies can operate on negative working capital. Excess working capital can also be used by a purchaser of a company to help pay for it..The quick ratio combined with the inventory turnover ratio may be a better indicator of efficiency.

Answer 4

It's basically how much money you have to work with/play with. It's how much money you have at your disposal at a specific time.

When you purchase an asset, you increase your working capital as an asset can be turned into cash

Answer 5

Working capital is the money that the company actually can spend. Profit isn't exactly profit considering they take out depreciation expenses and other expenses that aren't actually out of pocket expenses at that moment. Working capital just shows how much money they really have to play with.

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Answer 6

It's like the money in the cash register. You need to pay for power, taxes, etc and need monay liquid and available. It is not invested, gains no interest and if the business folds you get it back as cash.

Answer 7

It's the cash you have to work with. The money available.