Working Capital
What Is Working Capital?
Working capital is the difference between a company’s current assets and its current liabilities, representing the funds available to support day-to-day business operations.
Current assets may include:
- Cash
- Accounts receivable
- Inventory
- Current liabilities may include:
- Short-term debt
- Accounts payable
- Operating expenses
Working capital reflects a company’s ability to manage short-term financial obligations.
Why It Matters
Healthy working capital helps businesses operate smoothly and meet their immediate financial responsibilities.
Adequate working capital allows a business to:
- Pay employees and suppliers
- Maintain inventory
- Cover operating expenses
- Manage seasonal revenue fluctuations
Businesses with insufficient working capital may struggle to maintain operations or respond to unexpected costs.
How Working Capital Works
Working capital is calculated using a simple formula:
Working Capital = Current Assets − Current Liabilities
Example: If a company has $150,000 in current assets and $90,000 in current liabilities, its working capital is $60,000.
Positive working capital generally indicates that a business can meet its short-term obligations.
Working Capital vs Cash Flow
Working Capital → Measures short-term financial resources
Cash Flow → Tracks the movement of money in and out of a business
Both help evaluate financial stability but measure different aspects of business finances.
FAQs About Working Capital
What is considered good working capital?
The appropriate level varies depending on industry and business size.
Can businesses borrow working capital?
Yes. Some loans and credit lines are designed specifically for working capital needs.
Is working capital always cash?
No. It includes other short-term assets such as inventory and receivables.
Related Terms
