Definition - What does Working Capital mean?
Working capital is defined as a company’s current assets minus its current liabilities. In layman’s terms, it refers to the money that the company has in order to perform its day-to-day business operations. Specifically, it is the money available for a company or business to pay current debts. Working capital can include cash, accounts receivable, inventory, short-term investments, accounts payable, and other short-term liabilities.
Companies that do not have sufficient working capital can have difficulty in performing a variety of work activities, including paying employees, making payments to vendors and maintaining business operations.
Justipedia explains Working Capital
Most businesses understand the business concept of working capital, but the complexity of managing working capital may actually determine their success.
For example, businesses that fail to properly manage working capital, including paying bills too soon, collecting accounts receivable too slowly, or failing to manage inventory properly, may find that they do not have enough working capital. Unfortunately, some businesses that have high sales and profits can fail simply because they do not properly manage their working capital and consistently have shortages.
Business survival can also depend on a company’s ability to understand how its need for working capital can vary by industry. For example, businesses that have high, slower-moving inventories, which are difficult to convert to cash, will have to be more careful about ensuring that they have enough cash or cash equivalents to run their business.
Other companies that receive payment at the point of sale via online credit card transactions, however, may have less concern about collecting accounts payable.
Additionally, the risk of working capital shortage can also be reduced through an approved credit line with a high credit limit. Credit lines are especially beneficial for businesses that have a cyclical or seasonal sales season and need working capital to remain solvent in the off-season.