Updated on March 10, 2023
Working Capital can be defined as a company’s assets used for running day to day operations. It is used for its daily business needs, ensuring optimum liquidity and is a sign of a company’s operational strength and financial health.
Working Capital Explained
Working Capital as a financial metric is obtained by subtracting the Current Liabilities (wages, taxes, short-term debts, utilities etc) of a company from its Current Assets. (cash, raw materials, receivables and inventory) Current Assets are liquid instruments which can be easily converted into cash within one year. For example Cash in hand, bank balance, short-term investments, raw materials, receivables etc. Similarly, Current Liabilities are payments which are due within one year. For example wages, interests, outstanding bills, taxes, utilities etc.Working Capital helps in establishing the liquidity status of a company. A positive Working Capital means the business is strong and will be able to pay off its dues and carry on with future expansion.