The Working Capital is Indicator Shows
Ability to Settle Short Term Liabilities

The working capital (WC) is important to measure the Sewer Contractor liquidity ability (to repay his short-term liabilities) and this applies for Saudi Arabia companies and in other places.
There are three important issues associated with the (WC)

1) How to manage it?
The company manages the working capital (liquidity) by taking a group of decisions concerning the proper size of investment without (shortage or excess) in each item of the current assets, besides keeping the quality of these assets.

Also, these decisions should concentrate on how to use short-term loans as a source of financing the current assets. You should consider while paying these sources the principles of liquidity, profitability and harmonizing between the expected inflow and outflow cash of investments.

2) Choosing the funding sources lies under the following:
A) Cost of the Source.
B) Availability of the source.
C) When the funding is needed?
D) The impact of using a funding source comparing to other sources cost and availability.

3) Sources of Funding.
When we deal with sources of funding, it is necessary to identify features and problems of the financed sector, to define the best sources of funding and where the funding will be used. Getting to know the risks of lending is essential from credit provider's view, to develop the suitable conditions for lending, to reduce the impact of potential risks.

To serve the financing principle that imposes the alignment between funding sources and its uses, we should identify the lending purposes.

Before addressing the previous two issues, let us define the concept of the working capital

1) The Total Concept: It is the sum of the current assets such as (cash, securities, receivables, notes receivables and stock).

2) Net Concept: It equals the surplus amount after subtracting the current liabilities from the current assets (Networking Capital = Current Assets – Current Liabilities).

Both concepts are important. The total concept is essential to discuss funding for the constant operations, and to judge the right side of the balance sheet.

The net concept is important as an indicator to the safety of short-term creditors. Also, to specify which part of the current assets must be financed from long-term sources.

We will focus on the first concept, because it can express the elements that can be funded from short-term sources.

According to the first concept, investment is divided into two parts:

1) Permanent: It is the investment in the minimum limit of current assets, that is indispensable and should be kept as long as the project continues.

2) Variable: It is the investment in the excess limit over the minimum limit which is necessary to meet a seasonal expansion or a special expansion.

The most proper way to finance the permanent (WC) is to rely on the long-term sources. While the right way to finance the variable (WC) is to rely on the short-term sources, because the projects needs for this money can only be for a short time.

The investment in the working capital is usually subject to severe fluctuations, either for a seasonal consideration or expansion considerations, or both.

The size of the working capital can be determined by the following items
1) Average cash to be held to distinguish between the tied cash for security purposes, and the free cash for normal operations.

2) The rate of investment in securities. This element often has low importance in the construction sector.

3) Entrepreneur's deductions.

4) Average inventory of finished goods and spare parts.

5) Bids expenses that exceed its income.

6) Loans and notes receivables average period.

7) Prepaid expenses.
Return From Working Capital Page to Capital Management Page
Return From Working Capital to Sewer Contractor Management Guide