What is 'Working Capital'
Working capital, also known as net working capital, is the difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, like accounts payable.
Working Capital = Current Assets/Current Liabilities
BREAKING DOWN 'Working Capital'
Working capital is a measure of both a company's operational efficiency and its shortterm financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough shortterm assets to cover its shortterm debt. A good working capital ratio is considered anything between 1.2 and 2.0. A ratio of less than 1.0 indicates negative working capital, with potential liquidity problems, while a ratio above 2.0 might indicate that a company is not using its excess assets effectively to generate maximum possible revenue.
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If a company's current assets do not exceed its current liabilities, then it may have trouble paying back creditors or go bankrupt. A declining working capital ratio is a red flag for financial analysts.They might also look at the quick ratio, which is more of an acid test of shortterm liquidity because it only includes cash and cashequivalents, marketable investments and accounts receivable.
Changes in Working Capital Affect a Company's Cash Flow
Most projects require an investment in working capital, which reduces cash flow, but cash will also fall if money is collected too slowly, or if sales volumes are decreasing – which will lead to a fall in accounts receivable. Companies that are using working capital inefficiently can boost cash flow by squeezing suppliers and customers.
Things to Remember
 A company has negative working capital If the ratio of current assets to liabilities is less than one.
 A high working capital ratio isn't always a good thing. It might indicate that the business has too much inventory or is not investing its excess cash.
Ready to take your knowledge of Working Capital to the next level? Read — The Working Capital Position and Evaluating A Company's Capital Structure.

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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 >> 
Can working capital be too high?
Learn more about the working capital ratio, and understand how an excessively high ratio can be considered a negative in ... Read Answer >> 
How do you calculate working capital?
The formula for calculating working capital is straightforward, but lends great insight into the shortterm financial health ... Read Answer >> 
What changes in working capital impact cash flow?
Working capital is the amount of money a company has available to pay its shortterm expenses. Cash flow is the amount of ... Read Answer >> 
What can working capital be used for?
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What does high working capital say about a company's financial prospects?
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