Working capital is a vital measure of a company's short-term financial health and liquidity, calculated by subtracting current liabilities from current assets. It indicates a company’s ability to meet its short-term obligations and efficiently manage its operations. Positive working capital is a sign of financial stability, while negative working capital could signal potential liquidity challenges. 

Formula:

Working Capital = Current Assets − Current Liabilities

Why is working capital important?

• Liquidity management: Working capital is crucial for managing a company’s short-term liquidity, ensuring the business can continue operations smoothly by covering day-to-day expenses, such as paying employees and suppliers.

• Operational efficiency: Sufficient working capital allows businesses to take advantage of growth opportunities, invest in inventory, and negotiate better terms with suppliers.

• Debt management: Companies with healthy working capital are better positioned to manage debt, make timely payments, and maintain good relationships with creditors.

• Cash flow: Managing working capital effectively ensures that the company has enough cash to meet its obligations and avoid cash flow shortages.

• Business growth: Positive working capital provides a buffer for unexpected expenses and gives a company the ability to expand and reinvest in its operations without needing additional financing.