What is Working Capital?

What is Working Capital?

Working capital is the money available to a company for its day-to-day operations 💸

It's like the cash a company needs to pay its bills, buy inventory, and take care of other regular expenses.

 📢 Example

Imagine you have a Lemonade stand 🍋

The money you have in your cash box is your working capital. It's what you use to buy lemons, sugar, cups, and other supplies needed to make and sell lemonade.

  • If you have more money in your cash box than the cost of supplies, you have positive working capital. That means you have enough money to cover your expenses and have some leftover ✔️
  • But if you have less money than the cost of supplies, you have negative working capital, and it could be a problem because you might not have enough money to pay for everything you need 👀

✍️  Working Capital = Current Assets - Current Liabilities

In this formula, "Current Assets" refers to the company's short-term assets that can be easily converted into cash within one year, such as cash, accounts receivable, and inventory.

"Current Liabilities" represent the company's short-term obligations and debts that are due within one year, including accounts payable, accrued expenses, and short-term loans.

📌 If the result is positive, it's good because there's money left over after paying all the bills. If the result is negative, it means the company might struggle to pay its bills.

Businesses need to make sure they have positive working capital, so they can pay their bills, buy what they need, and have a safety net for unexpected expenses.

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