What is working capital?
If you ask your accountant, they will probably describe it in a simple equation: working capital is current assets minus current liabilities. Working capital is quite straightforward, once you understand what it’s all about.
In its simplest form, working capital is what’s left after you’ve tallied up your short term assets and subtracted your short term debts. What have you got left? That’s your working capital. It’s the money that is available to pay for immediate expenses, should you need it.
These expenses could include:
- Any wages you need to pay employees for additional hours;
- Repairs to any equipment, such as fixing a broken fridge;
- Purchasing more supplies when stocks are low; and
- Unexpected purchases you may need to make.
At a high level, working capital is an indicator of how efficiently a business is operating. It’s a measure of short-term health. By looking at current assets and liabilities, you can gauge whether a business is being managed effectively.