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explaining-the-differences-between-equity-and-working-capital | Capital Office

Explaining the differences between equity and working capital

While they are two substantially different concepts, many new business owners dont fully evaluate the variances between equity and working capital which could represent a clear financial error.

Indeed, according to specialists in the field, stockholders’ equity and working capital operate two completely different areas of business.

Stockholders’ equity, strictly speaking, is nothing more than business assets. That is, the difference between assets and total liabilities of a company.

Stockholders’ equity, experts add, consists of the capital, which basically refers to the assets assigned by the members to the company in which participants, reserves, dividends, profits and, in general, all assets net for those entitled owners or partners of the company.
In simple terms, equity is what actually owns a business.

Working capital, on the other hand, refers to the operational capacity of firms, i.e. the implementation of activities that typically allow them to create benefits.

While working capital also requires the comparison of assets and liabilities, the analysis has a short-term approach and does not consider the total assets and liabilities.

In simple terms, working capital is the difference between assets and liabilities for the short-term flows of your business.

Current assets to consider:

– The cash at hand
– Short term accounts receivable
– The bank accounts of your business

Within current liabilities, you must include:

– Payable to suppliers
– Taxes
– Payables

This working capital is needed to resolve unforeseen events that endanger the operating cycle of your business, such as machine breakdown or replacement of materials.

In short, stockholders’ equity refers to the actual value of the company, while working capital concerns what it has to remain active.