What is Working Capital?
Working capital is the difference between current assets and current liabilities.
How it Works
A business will have short term liability obligations.
This is usually mostly made up by money owed to suppliers.
Liabilities that need to be paid within the coming year are known as current liabilities.
Management and analysts continually assess the business’s ability to meet these short term obligations.
The business’s ability to meet short term obligations depends upon the level of current assets.
Current assets include money in the bank.
This money is available immediately.
Accounts receivable is also a current asset.
Most customers will pay what they owe in the coming year.
Inventory is also a current liability.
The business will sell its stock of inventory in the coming year.
To calculate working capital you deduct current liabilities from current assets.
© R.J. Hickman 2020