120 ShowMetheMoney
dated or corrected, may have embedded errors that arise in the trans-
mission process, an dmay be the pro duct of aggregating information
that is dissimilar or noncomparable. This is not to say that these
systems are worthless, only that you shoul dexercise care in using
them.^1
BUSINESS FUEL
Every business has debts coming due every day which require re-
sources to meet. The difference between short-term needs and re-
sources is calle dworking capital. It is a bit like fuel in an engine; it
is better to have a full tank, but overfilling can be dangerous. Too
little working capital can pose a threat to the ability of a company
to operate in the ordinary course over the immediate future, but too
much working capital can mean that resources are not being de-
ploye din optimal ways.
The right level of working capital varies across businesses. One
way to determine how much working capital is needed and assess
its adequacy is to compare the working capital to sales. Typically, a
retailing business that generates substantial sales of low-cost items,
such as a supermarket, needs less working capital per dollar of sales
(perhaps around 10 to 15%) than does an industrial manufacturer of
high-ticket items such as airplanes (perhaps aroun d25 to 35%). A
manufacturer of consumer goods—say, Carnation or Clorox—might
require some level in between.
Other businesses can operate with low or even negative working
capital. Companies in the restaurant business, McDonald’s, for ex-
ample, often operate with negative working capital because of the
cash nature of the business. This system provides direct liquidity,
an dpayment terms with suppliers usually permit payment after pro d-
uct is both receive dan duse din the business to generate cash. Com-
panies in other industries can benefit from the same combination,
as Amazon.com aptly demonstrates by operating sometimes with
negative working capital without apparent impairment of its ability
to meet obligations as they come due.
In the oil an dgas in dustry, a principal source of cash is prove d
reserves that are produced in the ensuing year. While they cannot
be reporte das working capital on the balance sheet un der generally
accepte daccounting principles, they are turne dinto cash. Compa-
nies in other industries sometimes fund new construction by issuing