mark gomes

Working capital is a financial metric that measures a company's ability to meet its short-term liabilities with its short-term assets. Essentially, it shows if a company has enough liquid assets to cover its day-to-day operations.

How to Calculate Working Capital:
Working capital is calculated using the following formula:

Working Capital = Current Assets - Current Liabilities

Here’s what each term means:

Current Assets: These are assets that a company expects to convert into cash or use up within one year, such as cash, accounts receivable (money owed by customers), and inventory.
Current Liabilities: These are obligations the company must pay within a year, such as accounts payable (money owed to suppliers), short-term loans, and other short-term debts.
Example:
Let’s say a company has:

Current Assets of $100,000 (including cash, receivables, and inventory)
Current Liabilities of $60,000 (including payables and short-term debts)
Working Capital = $100,000 (Current Assets) - $60,000 (Current Liabilities)
Working Capital = $40,000

This means the company has $40,000 in working capital, which indicates it should be able to cover its short-term debts and operating expenses.

Why Working Capital is Important:
Liquidity: Positive working capital means a company can pay off its short-term liabilities and invest in daily operations. Negative working capital might indicate financial trouble and the need to borrow or raise funds.
Operational Efficiency: Monitoring working capital helps businesses manage cash flow, ensuring they don't run into cash shortages.
Financial Health: Healthy working capital suggests a company is in a good financial position to handle unexpected expenses or take advantage of opportunities.