Working Capital

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 capital. Large quantities of working capital indicate potential to expand quickly. Firms with low levels of working capital may encounter liquidity issues. For example, companies often need to make quick equipment purchases and must tap into working capital to do so. If a company has an insufficient amount of working capital, it may have to turn to other sources of funding, such as debt, potentially slowing 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.

Working Capital = Current Assets - Current Liabilities