======Short-Term Capital======
Short-Term Capital refers to the financial resources and assets that a company expects to convert into cash within one year. It's the lifeblood of a business's daily operations, distinct from [[Long-Term Capital]], which is used for major, long-lasting investments like factories or technology. Think of it as the cash in a company's wallet used for immediate needs, such as paying employees, buying raw materials, and keeping the lights on. This pool of resources is a critical component of a company's [[Working Capital]]—the difference between its current assets and current liabilities. Effective management of short-term capital ensures a company has enough [[liquidity]] to meet its obligations without disruption. For an investor, analyzing how a company handles its short-term capital provides a powerful glimpse into its operational efficiency and financial health. A business that constantly scrambles for short-term funds may be poorly managed or facing fundamental problems.
===== The Engine Room of a Business =====
If a company is a large ship on a long voyage, its long-term capital represents the sturdy hull and powerful engine designed for the journey. Short-term capital, however, is the fuel, crew provisions, and maintenance supplies needed to handle the day-to-day running of the ship. Without it, the ship grinds to a halt, no matter how powerful its engine.
This is why short-term capital is all about the operational cycle. A company spends cash on [[inventory]], sells that inventory (often on credit, creating [[accounts receivable]]), and then collects the cash from customers. The time it takes to complete this loop is known as the [[Cash Conversion Cycle]]. A shorter cycle is a sign of high efficiency; it means the company's cash isn't tied up for long periods in unsold goods or unpaid invoices. A well-oiled operational engine converts investments back into cash quickly, generating the funds needed to start the cycle all over again.
===== Where Does It Come From? =====
Companies have several ways to fill their short-term capital coffers, drawing from both internal and external sources.
==== Internal Sources ====
These are funds generated by the business itself. They are often the cheapest and most reliable sources.
  * **Retained Earnings:** Profits that the company reinvests back into its operations instead of paying out as [[dividends]].
  * **Operational Efficiency:** Simply put, managing day-to-day finances better. This includes collecting cash from customers faster and negotiating longer payment terms with suppliers (managing [[accounts payable]]).
==== External Sources ====
When internal funds aren't enough, a company can look for outside financing. These options typically come with interest costs and stricter terms.
  * **[[Trade Credit]]:** This is the "buy now, pay later" of the business world. Suppliers deliver goods and allow the company to pay them at a later date, usually within 30 to 90 days. It's one of the most common forms of short-term financing.
  * **[[Short-Term Loans]] & [[Lines of Credit]]:** Classic bank loans or flexible credit lines that a company can draw on as needed to cover cash shortfalls.
  * **[[Commercial Paper]]:** A type of unsecured, short-term debt issued by large, financially sound corporations to raise funds quickly. It's essentially an IOU sold to investors.
  * **[[Factoring]]:** Selling accounts receivable to a third party (a "factor") at a discount. The company gets cash immediately, and the factor takes on the task—and risk—of collecting the payment from the customer.
===== A Value Investor's Perspective =====
For a value investor, the [[income statement]] only tells part of the story. The real clues about a company's durability and management quality are often hidden in the [[balance sheet]], specifically in how it manages its short-term capital.
==== Gauging Financial Health ====
Two simple ratios provide a quick health check on a company's short-term financial position:
  - **The [[Current Ratio]]:** Calculated as [[Current Assets]] / [[Current Liabilities]]. This ratio answers the question: //"Does the company have enough liquid resources to cover its debts over the next year?"// A ratio above 1 suggests it does. Value investors often look for a ratio closer to 2, which provides a comfortable cushion. A consistently low or declining ratio can be a major red flag.
  - **The [[Quick Ratio]] (or Acid-Test Ratio):** Calculated as ([[Current Assets]] - Inventory) / [[Current Liabilities]]. This is a stricter test because it removes inventory, which can sometimes be hard to sell quickly. It answers: //"Can the company pay its immediate bills without relying on selling its inventory?"// A quick ratio above 1 is a strong sign of financial stability.
==== Red Flags and Green Lights ====
Scrutinizing a company's short-term capital management can reveal a lot about its underlying quality.
  * **Red Flags:**
    * **Growing Debt:** A company that increasingly relies on short-term loans to fund its daily operations may have a broken business model. Its core operations aren't generating enough cash to be self-sustaining.
    * **Ballooning Inventory:** If inventory is piling up faster than sales are growing, it could mean the company's products are no longer in demand. That inventory might have to be sold at a steep discount, hurting profits.
    * **Slowing Collections:** If accounts receivable are growing much faster than revenue, it suggests the company is struggling to get paid by its customers.
  * **Green Lights:**
    * **Strong [[Operating Cash Flow]]:** The best companies generate more than enough cash from their own operations to fund their short-term needs. They don't need to constantly borrow.
    * **Negative Cash Conversion Cycle:** This is a hallmark of an exceptionally powerful business model. It means the company collects cash from its customers //before// it has to pay its suppliers (think Amazon or Costco). The company is essentially being financed by its suppliers and customers for free, freeing up capital for growth. This is a powerful competitive advantage that value investors love to find.