Quick Summary
Working Capital equals Current Assets minus Current Liabilities.
Working Capital (also called Net Working Capital) is the difference between a company's current assets and current liabilities. It represents the liquid capital available to run day-to-day business operations.
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Components
Current Assets:
- Cash and bank balances
- Accounts receivable (debtors)
- Inventory/stock
- Prepaid expenses
- Short-term investments
Current Liabilities:
- Accounts payable (creditors)
- Short-term debt
- Accrued expenses
- Taxes payable
- Short-term provisions
Working Capital Cycle
Cash → Inventory → Accounts Receivable → Cash
The shorter this cycle, the less working capital required.
Positive vs Negative Working Capital
- Positive: Current Assets > Current Liabilities (most common)
- Negative: Current Liabilities > Current Assets (can be risky)
- Zero: Rare and indicates perfect matching
Key Points
- Current Assets minus Current Liabilities
- Funds for day-to-day operations
- Positive WC indicates liquidity cushion
- Too high WC may indicate inefficiency
- Working Capital Cycle affects cash flow