Working capital is a measure of a company's liquidity, operational efficiency and short-term financial health. It measures a company's ability to generate cash flow and meet its financial obligations.
It can help entrepreneurs make more informed decisions about their working capital needs and resource allocation to meet their goals.
It is calculated by subtracting total current liabilities from total current assets.
Current Assets: Current assets are those assets that can be readily converted into cash within one year. These assets are important because they give a company the resources it needs to fund its day-to-day operations.
Current Liabilities: Current liabilities are a company's financial obligations that are due within one year. They are typically short-term debts that a company incurs in the course of its normal business operations and must pay in the near future.
A positive working capital means that the company is able to pay off its short-term liabilities with its current assets. A negative working capital indicates that the company may be at risk of defaulting on its obligations.
“How to improve working capital”:
- Reduce inventory levels
- Streamline production process
- Extend payment terms with vendors
- Offer discounts for early payments
- Increase sales and reduce costs
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Current assets:
Current liabilities:
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