Working Capital (WC): Definition, Calculation & Analysis
Definition of Working Capital
Working Capital is a fundamental financial metric that illustrates a company's operational liquidity. It is calculated as the difference between a company's current assets (cash, accounts receivables, inventory) and current liabilities (accounts payable, accrued expenses). It reflects the short-term financial health and the operational efficiency of a company.
Calculation of Working Capital
A positive working capital indicates that a company can pay off its short-term liabilities with its short-term assets. On the other hand, negative working capital suggests potential liquidity problems.
Working Capital formula
Working Capital = Current Assets - Current Liabilities
Significance of Working Capital
Working Capital is a reflection of the company's short-term financial health and operating efficiency. A sufficient amount of working capital suggests a company can meet its short-term obligations without any strain, hence a positive working capital is a sign of financial strength. However, an excessively high working capital might indicate that the company is not using its assets efficiently to generate profits.
Analysis of Working Capital
The analysis of Working Capital involves observing the trends over time and comparing it with industry benchmarks. It can reveal the company's cash management, operational efficiency, and short-term financial performance. Regular monitoring and effective management of Working Capital are crucial for maintaining the financial health and ensuring the smooth operation of a company.
