Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and overall financial health.

Working Capital

A company’s working capital is the capital necessary for it to function on a daily basis, as it requires a certain amount of cash on hand to cover unexpected costs, make regular payments and buy raw materials used in production. Working capital is the difference between the company’s current assets and current liabilities. The working capital ratio, calculated by dividing current assets by current liabilities, indicates to analysts the company’s liquidity, or whether it has cash flow adequate enough to meet all of its short-term liabilities and expenses.

The working capital needed to operate a business varies between industries. A number of factors affect working capital needs, including asset purchases, past-due accounts receivable being written off, and differences in payment and collection policies.

Working capital reflects various company activities, such as debt management, revenue collection, payments to suppliers and inventory management. These activities are reflected in working capital, because it includes not only cash but also accounts payable and accounts receivable, inventory, portions of debt due within one year and some other short-term accounts.


For a company, liquidity essentially measures its ability to pay off its liabilities when they are due, or how easily and effectively the company can access the money it needs to cover its debts. Working capital reflects the liquid assets a company utilizes to make such debt payments.

  1. What does a low working capital ratio show about a company's working capital management?

    Find out the significance of working capital management for a company and look at the working capital ratio analysts use ... Read Answer >>
  2. Do working capital funds expire?

    Find out how and why a company's working capital can change over time, though the fund does not actually expire, and how ... Read Answer >>
  3. How does working capital management affect corporate earnings?

    Understand why it is critically important for companies to efficiently manage their working capital and how working capital ... Read Answer >>
  4. Is liquidity calculated by flow?

    Read about the differences between economic liquidity, financial liquidity and asset liquidity and how each respective type ... Read Answer >>
  5. Are current assets liquid or capital?

    Take a deeper look at liquid current assets for businesses and individuals, and learn how they differ from other types of ... Read Answer >>
  6. Does working capital include short-term debt?

    Learn about a company's working capital and how short-term debt is considered part of current liabilities and is included ... Read Answer >>
Related Articles
  1. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  2. Investing

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  3. Investing

    Working Capital Position

    Learn how to determine a company's working capital position to correctly analyze liquidity.
  4. Investing

    Understanding Liquidity Risk

    Make sure that your trades are safe by learning how to measure the liquidity risk.
  5. Investing

    Financial markets: Capital vs. Money Markets

    There are several key differences between capital markets and money markets as components of financial markets. Check out the similarities and differences between the two markets.
  6. Investing

    How Working Capital Works

    A firm's handling of working capital reflects its efficiency, financial strength and cash flow.
  7. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  8. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  9. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  10. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  1. Gross Working Capital

    Gross working capital is the sum of all of a company's current ...
  2. Trade Working Capital

    Trade working capital is the difference between current assets ...
  3. Working Capital Management

    A managerial accounting strategy focusing on maintaining efficient ...
  4. Net Liquid Assets

    Net liquid assets are a strict measure of an immediate or near-term ...
  5. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  6. Capital Investment

    Capital investment refers to funds invested in a firm or enterprise ...
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center