Working Capital

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Definition

The difference between current assets and current liabilities. Illustrates the amount of liquid assets that a company has to build its business.

Working capital are funds used for operational liquidity. A firm often has day to day liquidity needs that require short term liquidity. Large quantities of working capital indicate potential to expand quickly. Firms needing to make quick equipment purchases through working capital frequently arise. Firms that do not have sufficient working capital (or negative amounts) may find themselves having to borrow the money from other means, slowing down growth.

While having a surplus of working capital is good for growth, excess amounts of working capital may mean the company could find better uses of its current assets.

Formula

Working Capital = Current Assets - Current Liabilities

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