Working Capital
Short-term financial health of a business.
Formula
Variables
Example
Positive means liquid
How it works
Working capital shows how much short-term resource a business has left after paying its short-term obligations. It is found by subtracting current liabilities, such as bills due soon and short-term loans, from current assets, such as cash, inventory, and money owed by customers. A positive result means the business has enough near-term assets to cover near-term debts; a negative result suggests a possible cash-flow squeeze.
When to use it
Use this formula when checking whether a business can meet its upcoming payments without needing extra financing. It is common in budgeting, financial analysis, loan assessments, and deciding whether a company has enough liquidity to keep operating smoothly.
Worked example, step by step
Current assets = $85,000 Current liabilities = $62,000 Working capital = Current assets - Current liabilities Working capital = $85,000 - $62,000 Working capital = $23,000 So, the business has $23,000 of working capital.
Common mistakes to avoid
- Using long-term debts instead of current liabilities
- Including non-current assets like buildings or equipment in current assets
- Thinking working capital is the same as cash balance
Did You Know?
Positive working capital is a company's financial cushion for day-to-day operations.
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