What is Working Capital?

Working capital is computed by subtracting a business’s current liabilities from its current assets.

Current means that the assets and liabilities exist within the current year. The appropriate amount of working capital will vary from business to business. Some businesses have a need for a large amount of working capital, and some can maintain a healthy balance sheet with relatively little working capital. Whatever the situation is for a particular business, the approximate calculation for the amount of working capital that they have to use is arrived at by subtracting current liabilities from current assets.

Current assets includes cash and cash equivalents and current-year receivables. Current liabilities may include all current expenses down to the taxes owed for income and payroll, whatever is payable in the current year. Adequate working capital means that companies do not have to tie up assets to secure a line of credit.