Working capital is basically the amount of money a business has on hand to handle their everyday expenses and characterizes its operational efficiency and short-term financial health. In order to calculate it, the company has to subtract its current liabilities (like bills, wages, and short-term debt) from its current assets (like cash, inventory, and money owed by its customers).Â
Working capital matters because it’s what keeps a business running day-to-day. When a company has positive working capital, it means it can cover its short-term costs and has some cushion left. It’s like having a safety net: it can pay bills, meet payroll, buy inventory, and handle any short-term obligations without having to scramble for cash. Essentially, positive working capital allows businesses to take on new opportunities or grow without relying entirely on loans or outside funding​.
On the other hand, if a business has low or negative working capital—where liabilities are higher than assets—it can lead to cash flow problems, making it harder for them to stay afloat. Even profitable businesses can run into trouble if they don’t have enough working capital, especially if they’re waiting for their customer payments to come through or need to make big inventory purchases.
Working capital is also key for securing loans or credit, as usually lenders see it as a sign of financial health. In general, keeping a healthy balance of working capital helps businesses stay flexible, grow when needed, and tackle any unexpected expenses that come up along the way.
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