Working Capital

Key Highlights

• Working capital is a simple way to check a company’s financial health by looking at the difference between current assets and current liabilities.

• Working capital is calculated by subtracting a company’s current liabilities from its current assets.

What is Working Capital?

Working capital is a simple way to check a company’s financial health by looking at the difference between current assets and current liabilities. It shows whether a business has enough cash and resources to pay its bills and keep things running smoothly.

Key Parts

• Current Assets: It refers to resources a company owns that are either in cash form or can be easily converted into cash within a year.

• Current Liabilities: These are debts or bills due within a year, like money owed to suppliers (accounts payable), wages, short-term loans, taxes, or unearned revenue (like customer deposits for future services).

How to Calculate It?

Working capital is calculated by subtracting a company’s current liabilities from its current assets.

• Positive working capital: The company has more assets than debts, meaning it can easily cover bills and even invest in growth.

• Negative working capital: It means a company’s current liabilities exceed its current assets, suggesting it may face challenges in meeting short-term financial obligations. This could be a sign of potential financial stress or liquidity issues.

Why It Matters?

• Shows Financial Health: Working capital tells you if a company can handle its short-term debts without stress.

• Keeps Things Running: Good management of cash, inventory, and payments ensures the business doesn’t run out of money or tie up too much cash unnecessarily.

• Supports Growth: Extra working capital lets a company seize new opportunities or handle unexpected costs.

• Spots Risks: Low or negative working capital can be a red flag, hinting at financial struggles or even bankruptcy risk.