Working capital is current assets minus current liabilities, measuring the short-term liquidity a business has to meet its obligations over the next year.
Working capital, current assets minus current liabilities, shows whether a business can cover its short-term obligations from its short-term resources. Positive working capital means current assets (cash, receivables, inventory) exceed current liabilities (payables, short-term debt, taxes owing); negative working capital can signal a liquidity squeeze.
It is a key measure of financial health that lenders scrutinise. Managing it well, collecting receivables promptly, negotiating supplier terms, controlling inventory, frees up cash and reduces reliance on borrowing. Working capital problems, not lack of profit, sink many otherwise viable businesses.
A company has $120,000 in current assets and $80,000 in current liabilities, giving $40,000 of working capital, a cushion to fund operations and absorb timing gaps between paying suppliers and collecting from customers.
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