Working capital

Working Capital

Working capital (pronunciation: /ˈwɜːrkɪŋ ˈkæpɪtəl/), also known as net working capital (NWC), is a measure of a company's operational liquidity, operational efficiency, and short-term financial health. It is calculated as the difference between a company's current assets and current liabilities.

Etymology

The term "working capital" is believed to have originated from the old English term "weorcian" which means to work, and "capital" from the Latin "capitalis" which means head, referring to the main or principal amount of money. The term thus refers to the principal amount of money that is 'working' or used in the operations of a business.

Definition

Working capital is a financial metric that represents the operating liquidity available to a business. It is a measure of both a company's operational efficiency and its short-term financial health. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors or go bankrupt.

Calculation

The formula for calculating working capital is straightforward:

Working Capital = Current Assets - Current Liabilities

Where:

• Current Assets are the resources that a company expects to convert into cash within one fiscal year or operating cycle.
• Current Liabilities are the company's debts or obligations that are due within one fiscal year or operating cycle.

Importance

Working capital is important for businesses as it is a measure of both a company's operational efficiency and its short-term financial health. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors or go bankrupt.

Related Terms

• Current Assets
• Current Liabilities
• Operating Cycle
• Liquidity Ratios
• Cash Conversion Cycle

External links

• Medical encyclopedia article on Working capital
• Wikipedia's article - Working capital

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