Final answer:
Working capital, also known as net working capital, is a measure of a company's liquidity and operational efficiency. It is calculated by subtracting current liabilities from current assets. Positive working capital indicates that a company can meet its short-term obligations, while negative working capital may indicate financial difficulties.
Step-by-step explanation:
Working capital, also known as net working capital, is a measure of a company's liquidity and operational efficiency. It is calculated by subtracting current liabilities from current assets.
Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt.
For example, if a company has $200,000 in current assets and $150,000 in current liabilities, its working capital would be $50,000 ($200,000 - $150,000).
Positive working capital indicates that a company can meet its short-term obligations, while negative working capital may indicate financial difficulties.
Having sufficient working capital is crucial for businesses to maintain day-to-day operations, invest in growth opportunities, and cover unexpected expenses.
It allows companies to pay suppliers, fulfill orders, and manage cash flow effectively. Managing working capital efficiently is important for financial stability and long-term success.