Short definition: Working capital is a financial metric that represents the difference between a company’s current assets and current liabilities.
Explanation: It measures a company’s ability to fund its day-to-day operations and meet its short-term financial obligations. A positive working capital balance indicates that a company has enough liquid assets to cover its short-term debts, while a negative balance suggests potential liquidity problems.
Example: A company with $100,000 in current assets (e.g., cash, accounts receivable, inventory) and $70,000 in current liabilities (e.g., accounts payable, short-term debt) would have $30,000 in working capital.
Additional information (optional): Working capital management is crucial for a company’s financial health. It involves optimizing the levels of current assets and liabilities to ensure sufficient liquidity while minimizing the cost of holding excess assets.