Working Capital

Definition

Working capital is a measure of a company's liquidity and financial health. It is calculated by subtracting current liabilities from current assets. Current assets are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are obligations that must be paid within one year, such as accounts payable, taxes, and short-term debt.

Example

For example, if a company has $1 million in current assets and $500,000 in current liabilities, its working capital is $500,000. This means that the company has $500,000 in liquid assets that can be used to pay its short-term obligations.

Why it Matters

Working capital is important for businesses because it indicates their ability to pay their short-term obligations. Companies with high working capital are better able to pay their bills on time and have more flexibility to invest in growth opportunities. Companies with low working capital may struggle to pay their bills on time and may be unable to take advantage of growth opportunities.

For accounting professionals, understanding working capital is essential for assessing a company's financial health. By monitoring a company's working capital, accounting professionals can identify potential problems and take steps to address them. This can help ensure that the company is able to meet its short-term obligations and remain financially healthy.