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.
