Working capital is a financial metric that represents the operating liquidity available to a business, organization, or other entity, including governmental entities. It is the difference between a companys current assets and current liabilities. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and debts. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital. A company has negative working capital if its ratio of current assets to liabilities is less than one (or if it has more current liabilities than current assets) . On the other hand, positive working capital indicates that a company can fund its current operations and invest in future activities and growth.
The management of working capital involves managing inventories, accounts receivable, accounts payable, and cash. Working capital management is a business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to their most effective use. It requires monitoring a companys assets and liabilities to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations.
