Formula
Working Capital = Current Assets − Current Liabilities
The Short Version
Working capital measures the cash a company has tied up in its day-to-day operating cycle — the buffer available to cover short-term obligations. It's a core measure of short-term financial flexibility.
Explain It Like I'm 10
Imagine you have $30 in your wallet (current assets) but you owe your friend $10 that's due this week (current liabilities). What's left over to comfortably handle whatever comes up — $20 — is your 'working capital': the cash cushion available for near-term needs after covering what you owe soon.
Step-by-Step Example
- 1 Current assets: $50,000,000.
- 2 Current liabilities: $30,000,000.
- 3 Working Capital = $50,000,000 − $30,000,000 = $20,000,000.
- 4 Positive working capital means the company can comfortably cover its bills due within the year.
- 5 Some businesses (like grocery stores that sell food before paying suppliers) can actually run fine with LOW or negative working capital — the number needs context from the specific business model, not a blanket rule.
Quick Recap
- ✓ Positive working capital means a company can comfortably cover its near-term obligations.
- ✓ Negative working capital isn't always bad — some business models (like retailers that sell inventory before paying suppliers) can run efficiently with low or negative working capital.