Term: Working capital
What is working capital?
Working capital is the amount of cash your business has after factoring in your short term debts. Your working capital is your current assets less your current liabilities.
Your current assets include:
cash (and cash
Your current liabilities include:
loans and debts
Let’s say you have $5,000 of current assets and $4,000 of current liabilities. This means you have a working capital of $1,000.
Current assets - current liabilities = working capital
$5,000 current assets - $4,000 current liabilities = $1,000 working capital
Working capital is a good way to judge the financial health of your business. This is useful because:
it helps you see how well your business is performing
it tells investors if your business is a good place for their money
If your working capital is low, your business might struggle to grow. But your working capital can also be too high – which is a sign you’re not properly reinvesting your cash. Keep in mind how soon you can turn your assets into cash. Even businesses with large amounts of working capital might have poor cash flow if they struggle to convert assets to cash.