Working capital
Working capital is the difference between a firm's current assets and its current liabilities. Current assets include cash, accounts receivable, and inventory; current liabilities include trade payables and short-term debt.
See it move
A waterfall chart starts with current assets of €85,000, then deducts current liabilities of €52,000 as a downward bar, arriving at working capital of €33,000. Working capital represents the short-term liquidity buffer — the net resources available to fund day-to-day operations. A positive figure indicates that current assets are sufficient to cover current liabilities without needing to raise additional short-term finance.
The formula
Variables
- Working capital — net short-term liquidity buffer (€)
- Current assets — resources expected to convert to cash within one year (€)
- Current liabilities — obligations due within one year (€)
Positive working capital indicates the firm can cover its near-term obligations from its near-term assets; negative working capital signals a potential liquidity risk.
Check yourself
Altea Manufacturing reports: cash €12,000; accounts receivable €28,000; inventory €35,000; accounts payable €30,000; short-term bank loan €20,000. What is working capital?