Business Finance 101 – Working Capital – What it is and what it means

Working Capital – What it is and what it means
Working Capital – What it is and what it means

Working Capital is calculated as Current Assets (CA) minus Current Liabilities (CL) at a specific date. The CA and CL amounts are on your company’s balance sheet. For example, if your company’s balance sheet has current assets of $150,000 and current liabilities of $120,000 then your company’s working capital is $30,000.

Working Capital – Current Assets – Current Liabilities
But with a significant amount of working capital, a company can still have a period of cash shortage if its current assets are not turning to cash. As an example, a company with most of its current assets locked up in inventory. Or if a company has a large accounts receivables that are not being collected, the working capital amount isn’t much consolation when you can’t meet the payroll run!
Other financial ratios use the working capital components. They include the current ratio, quick ratio, accounts receivable turnover ratio, and inventory turnover ratio.
Good management keeps watch on current assets (receivables and inventory) to keep the cash coming into the bank.

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