Working Capital
Definition
Working capital is the difference between a company's current assets and current liabilities, measuring its short-term liquidity and operational efficiency.
Explanation
Working capital is calculated as Current Assets minus Current Liabilities. Positive working capital means a company can cover its short-term obligations with its short-term assets. Negative working capital may indicate liquidity problems.
Key components of working capital include cash, accounts receivable, inventory, and accounts payable. Effective working capital management involves optimizing the cash conversion cycle by collecting receivables quickly, managing inventory efficiently, and negotiating favorable payment terms with suppliers.
Example
A company has $300,000 in current assets (cash, AR, inventory) and $200,000 in current liabilities (AP, short-term debt), resulting in working capital of $100,000.