What is working capital?

Your current assets include:

• cash (and cash
  equivalent items)

• accounts receivable

• prepaid expenses

• inventory

Your current liabilities include:

• accounts payable

• payroll

• loans and debts

• unpaid taxes

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:

1. it helps you see how well your business is performing

2. 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.