Working Capital
Explanation: Working capital is the difference between a company’s current assets and current liabilities. It is a measure of 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 has current assets of $500,000 and current liabilities of $300,000. Its working capital is $200,000 ($500,000 – $300,000), indicating good short-term financial health.
Reference Link: For more information on working capital, visit Investopedia’s Working Capital.
FAQs:
- Why is working capital important?
- It measures a company’s ability to meet short-term obligations and fund day-to-day operations.
- How can a company improve its working capital?
- By increasing current assets or decreasing current liabilities through efficient inventory management, receivables collection, and payables management.
- What is the working capital ratio?
- The working capital ratio, or current ratio, is calculated by dividing current assets by current liabilities.
- Can working capital be negative?
- Yes, negative working capital indicates that current liabilities exceed current assets, potentially leading to liquidity issues.
- How does working capital affect cash flow?
- Effective working capital management ensures sufficient cash flow to meet short-term obligations and invest in growth opportunities.