What is Adjusted Working Capital?

Adjusted Working Capital

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Adjusted Working Capital

Adjusted working capital is a measure of a company’s short-term liquidity, reflecting the net difference between current assets and current liabilities after adjusting for certain non-operational items. This metric provides insight into a company’s ability to cover its short-term financial obligations and efficiently manage its working capital.

To calculate adjusted working capital, you start with the traditional working capital formula:

Working Capital = Current Assets – Current Liabilities

Then, you make adjustments to exclude non-operational items, which can include:

  • Removing cash and cash equivalents from current assets, as they can be considered too liquid to be included in working capital analysis.
  • Excluding short-term debt and any interest-bearing liabilities from current liabilities, as they are considered part of the company’s financing structure rather than operational liabilities.
  • Removing any non-operational assets or liabilities that are not directly related to the company’s core business operations.

After making these adjustments, you’ll have the adjusted working capital value, which is a more accurate representation of the company’s operational liquidity and efficiency in managing its working capital.

Example of an Adjusted Working Capital

Let’s consider a hypothetical company, ABC Corp., and calculate its adjusted working capital using the given financial information:

Current Assets:

  • Cash and cash equivalents: $50,000
  • Accounts receivable: $80,000
  • Inventory: $120,000
  • Prepaid expenses: $20,000

Current Liabilities:

First, let’s calculate the traditional working capital: Working Capital = Current Assets – Current Liabilities Working Capital = ($50,000 + $80,000 + $120,000 + $20,000) – ($60,000 + $40,000 + $30,000 + $10,000) Working Capital = $270,000 – $140,000 Working Capital = $130,000

Now, let’s calculate the adjusted working capital by making the necessary adjustments:

  1. Remove cash and cash equivalents from current assets: Adjusted Current Assets = $270,000 – $50,000 = $220,000
  2. Exclude short-term debt from current liabilities: Adjusted Current Liabilities = $140,000 – $40,000 = $100,000
  3. In this example, there are no non-operational assets or liabilities to adjust.

Adjusted Working Capital = Adjusted Current Assets – Adjusted Current Liabilities Adjusted Working Capital = $220,000 – $100,000 Adjusted Working Capital = $120,000

So, the adjusted working capital for ABC Corp. is $120,000, which represents its operational liquidity and efficiency in managing its working capital.

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