Working Capital definition
Learn what working capital is and how to calculate it. Understand the working capital formula and how working capital loans help manage short-term business finances.
What Is Working Capital?
Working capital is a measure of a company’s short-term financial health and operational efficiency.
It represents the difference between current assets and current liabilities, showing whether a business has enough resources to cover its short-term obligations.
Positive working capital indicates the company can fund day-to-day operations and invest in growth, while negative working capital may signal liquidity issues.
How to Calculate Working Capital
To calculate working capital, subtract a company’s current liabilities from its current assets.
Current assets include cash, accounts receivable, inventory, and other assets expected to be converted into cash within a year.
Current liabilities include accounts payable, short-term loans, accrued expenses, and other obligations due within the same period.
Working Capital Formula
The working capital formula is simple:
Working Capital = Current Assets – Current Liabilities
This formula helps businesses assess their ability to meet short-term obligations and maintain smooth operations.
Net Working Capital
Net working capital (NWC) is another term for working capital, often used interchangeably.
It represents the net amount of current assets available after settling current liabilities.
Monitoring NWC is essential for liquidity management and financial planning.
Net Working Capital Formula
The net working capital formula is the same as the working capital formula:
Net Working Capital = Current Assets – Current Liabilities
A positive NWC indicates financial stability and operational flexibility, while a negative NWC suggests potential liquidity challenges.
Working Capital Loan
A working capital loan is a type of short-term financing designed to cover daily operational expenses when current assets are insufficient.
Businesses use these loans to manage cash flow gaps, pay suppliers, cover payroll, or handle unexpected expenses, ensuring smooth business operations even when liquidity is temporarily low.
