What is working capital?
Working capital represents the difference between a company’s current assets and current liabilities. It measures the short term financial health of a business and its ability to operate on a day to day basis.
Why is working capital important?
Working capital indicates whether a business can meet its short term obligations such as paying suppliers, employees, and operating expenses. Strong working capital supports smooth operations and reduces financial stress.
How is working capital calculated?
Working capital is calculated by subtracting current liabilities from current assets. A positive result indicates surplus resources, while a negative result signals potential liquidity issues.
What does negative working capital mean?
Negative working capital means current liabilities exceed current assets. This may indicate cash flow problems and difficulty meeting short term obligations, though in some industries it can reflect efficient operations.
How can businesses improve working capital?
Businesses improve working capital by collecting receivables faster, reducing excess inventory, extending payment terms with suppliers, and managing cash flow more effectively.