Working capital is the difference between a company's current assets and current liabilities. It measures a company's short-term liquidity and operational efficiency.
5 Must Know Facts For Your Next Test
Working capital is calculated as Current Assets minus Current Liabilities.
A positive working capital indicates that a company can cover its short-term debts and invest in its operations.
Negative working capital can signal potential liquidity problems for a business.
Working capital management involves decisions related to inventory, accounts receivable, and accounts payable to ensure sufficient liquidity.
The working capital ratio, also known as the current ratio, is found by dividing Current Assets by Current Liabilities.
Review Questions
How do you calculate working capital?
What does a negative working capital indicate about a company's financial health?
Which financial statement components are used to determine working capital?
Related terms
Current Assets: Assets that are expected to be converted into cash or used up within one year.
Current Liabilities: Obligations that are due to be settled within one year.
Current Ratio: A liquidity ratio calculated as Current Assets divided by Current Liabilities, indicating a company's ability to pay short-term obligations.