Working capital is a key indicator of a company’s ability to withstand an economic downturn or a financial crisis. It refers to the difference between the company’s assets (cash or any assets that can be converted into cash within a year) and the company’s current liabilities, such as payroll, accounts payable and accrued expenses.
A company’s working capital is calculated by subtracting current liabilities from current assets, as defined by the financial controller on the company’s official balance sheet. Current assets include cash, accounts receivable and inventory. Current liabilities include accounts payable, taxes, wages and interest owed to banks or other creditors.
A good working capital value is always a positive number, as calculated based on the formula defined above. If a company’s working capital is negative, this is either a sign of a looming crash or a gamble that can be positively balanced by an incoming cash flow greater than the current negative working capital or deficit.
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