Does Working Capital Include Salaries?

Businesses need working capital to cover their day-to-day operational costs such as equipment and salaries. The amount of working capital a business has depends on inventory management, debt management, revenue collection, and payments to vendors. Many small business owners may need a loan to establish cash flow for their working capital.

A company accrues unpaid salaries on its balance sheet as part of accounts payable which is a current liability account. Unpaid salaries are therefore included in the calculation of the company's working capital. A company wouldn't record paid salaries as current liabilities, however, so they wouldn't affect the calculation of working capital.

Understanding Working Capital and Salaries

Many small businesses resort to loans to provide working capital. Businesses need cash to pay their bills and to cover workers' salaries. Workers' salaries must be covered if a business is to continue operations.

There must be sufficient working capital to cover salaries and the inevitable expenses such as equipment breakdowns or delays in incoming cash flow from clients and accounts receivables.

Unpaid Salaries

Unpaid salaries represent a company's arrears to its workers for a specific period. A company typically expenses unpaid salaries immediately through a debit entry to its income statement. The company hasn't yet paid those salaries so it has a liability to its workers and must accrue them by recording an equivalent credit entry to its accrued salaries account. This is shown as a current liability account on the company's balance sheet.

Current liabilities are part of the working capital calculation so unpaid salaries reduce the company's working capital. Unpaid salaries typically arise as a result of the timing between closing the company's books and when the payroll payment to its workers goes out of the cash account.

Paid Salaries

Accountants record a credit entry to the cash and cash equivalents account and a debit entry to the accrued salaries account when an unpaid salary is cleared through a payment to the workers. A company doesn't owe money to its workers and its balance sheet doesn't contain a current liability account if it's paid all salaries. Salaries therefore don't affect the working capital of a company that has paid all its wages.

The Bottom Line

Having sufficient working capital is critical to a company’s financial health. It measures its ability to fund day-to-day operations and remain in business. The calculation works out to its current assets less its current liabilities.

Salaries and other employee costs would be included in the calculation if they’re owed and not yet paid. Salaries and benefits that have been paid would not be included because they’re no longer considered current.