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What is working capital?

Author:
Harold Averkamp, CPA, MBA

Definition of Working Capital

Working capital is the amount of a company’s current assets minus the amount of its current liabilities.

Example of Working Capital

Let’s assume that a company’s balance sheet dated June 30 reports the following amounts:

  • Total amount of current assets is $323,000
  • Total amount of current liabilities is $310,000

Therefore, the company’s working capital on June 30 was $13,000. If one year earlier the company had current assets of $210,000 and current liabilities of $60,000, its working capital was $150,000.

Additional Comments on Working Capital

The adequacy of a company’s working capital depends on the industry in which it competes, its relationship with its customers and suppliers, and other factors such as the following:

  • The types of current assets and how quickly they can be converted to cash. For instance, marketable securities can be converted to cash much faster than inventory.
  • The nature of the company’s sales and how customers pay. If a company has very consistent sales via the Internet and its customers pay with credit cards at the time they place the order, a small amount of working capital may be sufficient. However, another company in an industry where the credit terms are net 60 days will need a greater amount of working capital.
  • Having an approved credit line with no borrowing allows a company to operate comfortably with a small amount of working capital.

In short, there is more to working capital than simply subtracting current liabilities from current assets.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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