Working Capital
Working capital is a financial metric that measures a company’s short-term liquidity and its ability to meet its obligations. It is calculated by subtracting a company’s current liabilities from its current assets. Working capital is important because it helps a company pay its bills and manage its short-term debt. A company with a positive working capital is considered to be in good financial health, while a company with a negative working capital may be at risk of bankruptcy.
History of Working Capital
The concept of working capital has been around since the early 1900s. It was first introduced by economist Irving Fisher, who defined it as “the amount of capital that is necessary to carry on the business of a firm.” Since then, the concept has been widely used by businesses and investors to measure a company’s financial health. Working capital is also used by banks and other lenders to determine a company’s creditworthiness.
Comparison of Working Capital
| Company | Current Assets | Current Liabilities | Working Capital |
|---|---|---|---|
| Company A | $100,000 | $50,000 | $50,000 |
| Company B | $200,000 | $150,000 | $50,000 |
Summary
Working capital is an important financial metric that measures a company’s short-term liquidity and its ability to meet its obligations. It is calculated by subtracting a company’s current liabilities from its current assets. Companies with a positive working capital are considered to be in good financial health, while companies with a negative working capital may be at risk of bankruptcy. For more information about working capital, you can visit websites such as Investopedia, The Balance, and the Small Business Administration.
See Also
- Cash Flow
- Current Assets
- Current Liabilities
- Liquidity
- Cash Conversion Cycle
- Accounts Receivable
- Accounts Payable
- Inventory
- Net Working Capital
- Return on Investment
