1. What is Working Capital?

Working Capital (WC) is a financial metric that represents the operating liquidity available to a business. It's calculated as current assets minus current liabilities, or more specifically as Inventory plus Receivables minus Payables.

2. How Does the Calculator Work?

The calculator uses the Working Capital formula:

Where:

• \( Inventory \) — Value of current inventory
• \( Receivables \) — Amounts owed to the company
• \( Payables \) — Amounts the company owes

Explanation: This calculation shows the short-term financial health of a company and its ability to cover short-term obligations with short-term assets.

3. Importance of Working Capital

Details: Positive working capital indicates a company can fund its current operations and invest in future activities. Negative working capital may signal potential liquidity problems.

4. Using the Calculator

Tips: Enter all values in dollars. Inventory and receivables should be positive numbers representing assets, while payables represent liabilities.

5. Frequently Asked Questions (FAQ)

Q1: What is a good working capital ratio?
A: Generally, a ratio between 1.2 and 2.0 is considered healthy, but this varies by industry.

Q2: Can working capital be negative?
A: Yes, negative working capital means current liabilities exceed current assets, which may indicate financial stress.

Q3: How often should working capital be calculated?
A: Businesses should monitor working capital regularly, typically monthly or quarterly.

Q4: What's the difference between working capital and cash flow?
A: Working capital is a snapshot of current assets/liabilities, while cash flow measures actual cash movement over time.

Q5: How can a company improve its working capital?
A: Strategies include collecting receivables faster, managing inventory efficiently, and negotiating better payment terms with suppliers.