Working capital refers to a company's operational liquidity and is calculated as current assets minus current liabilities. Current assets include cash, accounts receivable, and inventory expected to be used within a year, while current liabilities are short-term debts like accounts payable due within a year. Positive working capital means a company has more current assets to cover short-term obligations, indicating financial strength, though too much working capital may show ineffective asset management. Negative working capital occurs when current liabilities exceed assets and can be temporarily due to large purchases.
2. DEFINITION
Working capital refers to the financial metric that represents the
operational liquidity of a business. It is the difference between a
company’s current assets and current liabilities.
3.
4. COMPONENTS OF WORKING CAPITAL
• Current Assets : These are assets that are expected to be converted into cash or
used up within one year . They include cash on hand, accounts receivable
(amounts owed to the company), and inventory (goods ready for sale).
• Current Liabilities: These are short-term obligations that a company needs to
pay off within one year. They include accounts payable (amounts owed by the
company), short-term debt, and accrued liabilities (expenses incurred but not
yet paid).
6. • Positive working capital is when a company has more current assets than current liabilities, meaning that the company can
fully cover its short-term liabilities as they come due in the next 12 months. Positive working capital is a sign of financial
strength; however, having an excessive amount of working capital for a long time might indicate that the company is not
managing its assets effectively
• Negative working capital is when current liabilities exceed current assets, and working capital is negative. Working capital
could be temporarily negative if the company had a large cash outlay as a result of a large purchase of products and services
from its vendors.
