Working Capital

Working capital is a key financial metric that represents the difference between a company’s current assets and current liabilities. It serves as a measure of a company’s short-term financial health and its ability to operate efficiently.

Working Capital = Current Assets − Current Liabilities

Understanding Working Capital Current Assets:

Assets that are liquid or can be converted into cash within one year, such as:

1. Cash and cash equivalents – ready money available for daily operations
2. Accounts receivable – money owed by customers
3. Inventory – raw materials, work-in-progress, and finished goods
4. Short-term investments or securities – investments that can be liquidated quickly
5. Current Liabilities: Obligations that must be settled within a year, including:
   • Accounts payable – money owed to suppliers
   • Short-term loans – borrowings due within a year
   • Taxes payable – outstanding tax liabilities Salaries and wages – employee compensation Interest and
   • other short-term obligations.

Importance of Working Capital Liquidity Indicator:

Shows if the company can meet short-term obligations without facing a cash crunch.

Operational Efficiency: Helps manage daily operations, such as paying suppliers, managing inventory, and covering salaries.

Financial Health: Positive working capital indicates that a company can cover its liabilities; negative working capital may signal financial stress.

Resource Optimization: Ensures effective utilization of assets and reduces idle funds, balancing cash, inventory, and receivables.

Types of Working Capital permanent Working Capital: The minimum level of current assets required for continuous operations.

Temporary (Variable) Working Capital: Additional capital needed during peak seasons or for special business activities.