Does Cash & Cash Equivalent include in Working Capital calculation?? (2024)

>>>According to the conventional definition, cash & cash equivalent is a component of working capital. There are several reasons why in practice cash should not be included in working capital.

As per standard definition of working capital, companies doesn’t necessarily require cash as a part of their core operation. There are some reasons-

Some companies exclude cash from working capital calculation due to the opportunity cost associated with holding excess cash e.g alternative use of cash for investment. In such cases, excluding cash from working capital provides a more accurate measure of companies operational liquidity.

Another reason is the financial flexibility. In uncertain economic situation cash can help company to cover some unexpected expenses which is not directly associated with company core operation.

Cash and cash equivalents in working capital calculations can also vary by industry and company size. Some industries with highly variable cash flows or specific capital requirements may choose to exclude cash equivalents from the working capital calculation, as it aligns better with their operational needs.

Many companies use customized financial metrics that better reflect their specific circ*mstances. For example, they might use "operating working capital" or "net working capital" that deducts cash and short-term debt.

It also can be varied based on investor or analyst perspective. They might look at cash ratios, cash flow analysis, or other metrics to gain a more comprehensive view of the company's cash position.

In summary, traditionally cash and cash equivalents are part of current assets and are often included in working capital calculations but some companies and financial analysts choose to exclude them due to the opportunity cost and other factors that are specific to the company's strategy and industry. It's important to consider the context and purpose of the analysis when deciding whether to include or exclude cash and cash equivalents in working capital considerations