What is the concept of working capital?

The concept of working capital refers to the difference between current assets and current liabilities. This metric is crucial as it provides insight into a company's short-term financial health and operational efficiency. Working capital indicates how well a company can cover its short-term obligations with its short-term assets. Positive working capital suggests that a company is able to fund its current operations and invest in future activities, while negative working capital may raise concerns about solvency and operational management.

Current assets typically include cash, inventory, accounts receivable, and other assets that are expected to be liquidated within one year. Current liabilities consist of obligations that are due within the same time frame, such as accounts payable, short-term loans, and other debts.

Understanding working capital is vital for managers and stakeholders as it affects daily operations, financial decision-making, and overall company stability. A well-managed working capital position can lead to improved cash flow and can also indicate effective management of receivables, inventory, and payables.