What is meant by "working capital"?

Working capital refers to the difference between current assets and current liabilities. This definition highlights the concept of liquidity and operational efficiency within a business. Current assets include cash and other assets that are expected to be converted into cash within a year, such as accounts receivable and inventory. Current liabilities, on the other hand, are obligations that the company expects to settle within the same timeframe, including accounts payable and short-term debt.

By subtracting current liabilities from current assets, working capital provides a measure of a company’s short-term financial health and its ability to meet its obligations as they arise. A positive working capital indicates that a company has sufficient short-term assets to cover its short-term liabilities, which is crucial for daily operations. In contrast, a negative working capital could signal potential liquidity issues, indicating that a company may struggle to fulfill its short-term financial commitments. This concept is vital for both management and investors as it helps assess the efficiency of a company’s operations and its ability to maintain stable financial footing.