How is working capital calculated?

Difference between Current Assets and Current Liabilities

Working capital is a fundamental financial metric that represents the difference between a company's current assets and its current liabilities. It is a measure of the company's short-term financial health and its ability to cover its day-to-day operational expenses and short-term obligations.
Mathematically, working capital can be expressed as: Working Capital = Current Assets - Current Liabilities
Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used up within a year. Current liabilities, on the other hand, include obligations such as accounts payable, short-term loans, and other debts that are due within a year. A positive working capital indicates that the company has more current assets than current liabilities, providing a buffer to meet short-term obligations and manage operational needs. It suggests that the company has enough liquidity to cover its immediate expenses. Conversely, a negative working capital means that the company's current liabilities exceed its current assets. This situation may indicate potential liquidity issues and could imply difficulties in meeting short-term financial obligations. A well-managed working capital is crucial for a company's financial stability and operational efficiency. It ensures that a business can maintain smooth operations, take advantage of growth opportunities, and withstand unexpected financial challenges.