Working Capital, Explained
The term ‘working capital’ may sound vaguely familiar from your college accounting class, but what does it actually mean? Working capital is a measurement of a business’s ability to pay off current liabilities using its current assets.
Working capital is instrumental in understanding your company’s growth, funding inventory, and overall success.
What is Working Capital?
Working capital, sometimes referred to as net working capital (NWC), measures the difference between a company’s current assets and current liabilities (what the business owns - what the business owes). Working capital helps measure your company’s short-term financial health, liquidity, and operational efficiency.
Current assets are the tangible and intangible goods owned by the company that can be turned into cash. This can include everything from checking and savings accounts, inventory, and accounts receivable to mutual funds, stocks, and bonds.
Current liabilities are debts or expenses that the company owes within the past year, and can include things like rent, accounts payable, salaries, and accrued income tax.
If your company’s current assets exceed your current liability, then you have positive working capital, meaning there is a high potential for growth. If your current assets equal your current liabilities, then you have zero working capital. This situation is common in demand-based organizations that have little to no inventory.
It’s essential for business people to understand what working capital is and why it is important in determining your company’s health. Check out this article on everything you want to know about working capital from JW Surety Bonds for a complete guide to what working capital is, why you need it, and how to improve yours.
For more information on working capital and why it’s important, check out the infographic below...