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Working Capital

Working capital is a financial metric that represents the difference between a company’s current assets (such as cash, accounts receivable, and inventory) and its current liabilities (such as accounts payable and short-term debt).It measures a company’s short-term liquidity and operational efficiency. Positive working capital indicates that a company can cover its short-term liabilities with its short-term assets, while negative working capital suggests potential liquidity problems.

Example

A company with $500,000 in current assets and $300,000 in current liabilities has working capital of $200,000, indicating it has sufficient liquidity to cover its short-term obligations.

Key points

• The difference between a company’s current assets and current liabilities, reflecting short-term liquidity.

• Positive working capital indicates financial health, while negative working capital signals potential liquidity issues.

• A key measure of operational efficiency and a company’s ability to meet short-term obligations.

Quick Answers to Curious Questions

It reflects a company’s ability to cover its short-term liabilities with its short-term assets, indicating liquidity and operational efficiency.

Negative working capital suggests that a company may face difficulties in meeting its short-term obligations, potentially signaling financial distress.

A company can improve its working capital by reducing its current liabilities, increasing current assets, improving inventory management, or speeding up accounts receivable collection.