Working capital is a financial metric that represents the amount of money a company has available to fund its day-to-day operations. It's calculated by subtracting a company's current liabilities (i.e., debts and obligations due within one year) from its current assets (i.e., assets that can be converted into cash within one year).
The resulting figure represents the amount of cash or cash-equivalent resources that a company can use to pay its bills, fund its inventory purchases, and meet other short-term obligations.
Having sufficient working capital is crucial for companies to ensure smooth operations and maintain financial stability. If a company does not have enough working capital, it may struggle to pay its bills, manage its inventory, or invest in growth opportunities.
Retail store has the following assets and liabilities as of the end of the fiscal year:
Current assets: $500,000
Current liabilities: $200,000
Working capital = Current assets - Current liabilities
Working capital = $500,000 - $200,000
Working capital = $300,000
This means that the store has $300,000 of working capital available to fund its day-to-day operations, pay its bills, and manage its inventory. A positive working capital like this is generally seen as a good sign, as it indicates that the store has sufficient resources to meet its short-term obligations.