HOMEPAGE

Working Capital

Definition

Working capital measures a company’s short‑term financial health by showing how much liquidity is available to fund day‑to‑day operations. It represents the difference between current assets and current liabilities.

$$\text{Working Capital}=\text{Current Assets}-\text{Current Liabilities}$$

Why It Matters

• Indicates whether a business can meet its short‑term obligations.
• Helps assess operational efficiency and cash management.
• Strong working capital supports stability, growth, and resilience during downturns.
• Weak or negative working capital may signal liquidity stress or poor financial planning.

Components

• Current Assets: Cash, accounts receivable, inventory, short‑term investments.
• Current Liabilities: Accounts payable, short‑term debt, accrued expenses.

Interpretation

• Positive Working Capital: The company can comfortably cover short‑term obligations.
• Negative Working Capital: The company may struggle to pay bills or maintain operations.
• High Working Capital: Can indicate strength, but may also suggest inefficient use of assets.
• Low Working Capital: May reflect tight operations or potential liquidity risk.

Example

A company has:

• Current Assets: $500,000
• Current Liabilities: $350,000

$$\text{Working Capital}=500,000-350,000=150,000$$

The business has $150,000 available to support daily operations.