1. What is Working Capital?

Working Capital is a financial metric that represents the operating liquidity available to a business. It's calculated as current assets minus current liabilities and indicates whether a company has enough short-term assets to cover its short-term debts.

2. How Does the Calculator Work?

The calculator uses the Working Capital formula:

Where:

• \( Current\ Assets \) — Cash and other assets expected to be converted to cash within one year
• \( Current\ Liabilities \) — Debts and obligations due within one year

Explanation: Positive working capital indicates a company can pay off its short-term liabilities, while negative working capital suggests potential liquidity problems.

3. Importance of Working Capital

Details: Working capital is crucial for assessing a company's short-term financial health and operational efficiency. It helps businesses manage cash flow, meet obligations, and fund operations.

4. Using the Calculator

Tips: Enter current assets and current liabilities in dollars. Both values must be positive numbers.

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, indicating the company has enough current assets to cover current liabilities.

Q2: Can working capital be negative?
A: Yes, negative working capital means current liabilities exceed current assets, which may indicate liquidity problems unless the business has strong cash flow.

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

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

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