Working capital is an important tool used by businesses to measure their financial health and solvency. It’s often referred to as a metric which helps business owners calculate the ability of their companies to pay current debts. But what is it really?
In simple terms, working capital is the difference between a company’s assets and liabilities that are due within one year. It can be calculated by taking current assets minus current liabilities. This figure shows how much of a company’s resources are liquid, meaning it tells the business owner if they have enough liquidity on hand to cover their short-term expenses. Working capital is a key indicator of how financially healthy the organization is and how efficiently it is managing its finances.
By monitoring and analyzing this figure regularly, businesses can get an accurate picture of their financial position and use this data to make smarter decisions about investments, debt levels, and operations.