Working Capital Analysis Definition
Working capital (WC), also known as net working capital, indicates the total amount of liquid assets a company has available to run its business. In general, the more working capital, the less financial difficulties a company has.
Working Capital Analysis Formula
Working Capital Analysis Calculation
For example, a company has $10,000 in current assets and $8,000 in current liabilities.
Working capital = 10,000 – 8,000 = 2,000
Working capital measures a company’s operation efficiency and short-term financial health. For example, positive working capital shows that a company has enough funds to meet its short-term liabilities. In comparison, negative working capital shows that a company has trouble in meeting its short-term liabilities with its current assets.
Working capital provides very important information about the financial condition of a company for both investors and managements. For investors, it helps them gauge the ability for a company to get through difficult financial periods. For management members, it helps them better foresee any financial difficulties that may arise. In conclusion, it is very important for a company to keep enough working capital to handle any unpredictable difficulties.