Working capital is the money which is employed in a company’s day-to-day operations. It is cash or liquid assets necessary for running a company’s daily activities. It helps to find out if a business has enough current assets to cover all its short-term liabilities. It also helps in the efficient management of a company’s operations and maintenance of its financial health.
In case of a deficient working capital scenario Current Assets < Current Liabilities, which means the company has to pay more money than it will receive in the short-term. Inadequate working capital is the first sign of financial problems for a business and shows that it is struggling to keep up with its daily operations.
How to Calculate Working Capital
The excess of current assets over current liabilities is known as the working capital, it is calculated as follows:
Working Capital = Current Assets – Current Liabilities
WC = CA – CL
Example of Working Capital
Calculate the working capital for a business, when current assets and current liabilities are as follows:
Current Assets = 3,00,000, Current Liabilities = 1,75,000
As Working Capital = Current Assets – Current Liabilities
WC = 3,00,000 – 1,75,000
WC = 1,25,000
Examples of current assets include Debtors, Cash, Bank, Inventory, Prepaid Expenses, etc., and current liabilities are Creditors, Overdraft, Outstanding Expenses, etc.