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Understanding Working Capital
Working capital (WC) is a financial metric that represents a business' operating liquidity. Net working capital is defined as:
Current Assets - Current Liabilities = Net Working Capital
If current assets are less than current liabilities, an entity has a working capital deficiency.
A company may report material assets and profitability but insufficient liquidity if its assets cannot be readily converted to cash.
Positive working capital (liquidity) is necessary to ensure a firm's ability to continue operating.
Working capital management involves managing inventories, accounts receivable, accounts payable, and cash, so there is sufficient
cash flow to meet both maturing short-term debt and necessary operating expenses.
The goal in managing working capital is to
manage current assets and short term financing such that cash flows and returns are acceptable.
Management uses a combination of policies and techniques for managing working capital, including the following:
