Learn: Working Capital - Meaning and Calculation

Welcome!You've already learned about budgets, variances, and balance sheets, which form the foundation of understanding business finances. Today, we'll explore working capital—its meaning and calculation—building on your prior knowledge.

What is Working Capital?Working capital is the money a business has available to cover its day-to-day operational expenses. It is calculated by subtracting current liabilities from current assets.It is important because it shows whether a business can meet its short-term financial obligations and maintain smooth operations.

Current Assets and Current LiabilitiesCurrent assets include items like cash, accounts receivable, and inventory—things that can be turned into cash within a year.Current liabilities are obligations such as accounts payable or short-term loans that need to be paid within a year.

How to Calculate Working CapitalThe formula for working capital is:Working Capital = Current Assets - Current LiabilitiesThis calculation helps a business determine whether it has enough resources to pay its short-term debts using assets that are easily liquidated.

Why is Working Capital Important?Having sufficient working capital ensures a business can pay its bills, manage unexpected expenses, and avoid financial difficulties. A lack of working capital may lead to cash flow problems and operational disruptions.

Positive vs Negative Working CapitalPositive working capital means a business has more current assets than liabilities, which is ideal for financial stability.Negative working capital indicates a business may struggle to cover short-term obligations, which could lead to liquidity problems.

Review Time!Great work! You've learned about working capital, its calculation, and its importance in business operations. Let’s test your understanding with a few questions.

Lesson Complete!Well done! You've mastered the meaning, calculation, and importance of working capital. Keep practising to strengthen your understanding further.