For Working Capital
Working capital refers to the funds a company uses for its day-to-day operations, such as paying bills, purchasing inventory, and covering short-term expenses. It’s a measure of a company’s liquidity and operational efficiency, indicating its ability to meet short-term financial obligations.
What is working capital?
Working capital is the difference between a company's current assets (like cash, inventory, accounts receivable) and its current liabilities (such as accounts payable, short-term debts). It represents the funds available for the daily operations of a business.
Why is working capital important?
Adequate working capital ensures that a company can meet its short-term financial obligations, such as paying suppliers, employees, and other operating expenses. It also reflects a company's financial health and ability to sustain operations.
How is working capital calculated?
Working capital is calculated by subtracting current liabilities from current assets. The formula is: Working Capital = Current Assets - Current Liabilities.
What is a positive working capital?
A positive working capital indicates that a company's current assets exceed its current liabilities, implying that it has enough liquid assets to cover short-term obligations.
What is a negative working capital?
A negative working capital means that a company's current liabilities exceed its current assets. While this situation may indicate financial strain, it could also suggest efficient management of working capital in industries where rapid turnover of inventory and receivables is common.
