1. Glossary
  2. > W
  3. > Working capital

Working capital

What is working capital?

Working capital is the sum of the cash and highly liquid investments that a business has on hand to pay for day-to-day operations. Technically speaking, working capital is equal to the total of a company’s current assets minus  its total current liabilities.

Deeper definition

If a firm has positive working capital, that means it has enough current assets to cover short-term debt. Current assets include cash and assets that can be turned into cash within one year, whereas current liabilities are debts due within one year of the date of the financial statement. If current liabilities exceed current assets, a company has a working capital deficiency or a working capital deficit.

Working capital management refers to business decisions governing a firm’s current assets and short-term liabilities. The goal is to prevent deficits and ensure the firm maintains the right amount of cash flow to satisfy both maturing short-term debt and its operational expenses.

Understanding the balance of short-term liabilities and current assets is aided by the quick ratio and the current ratio. In addition, the working capital turnover ratio measures how well a company supports sales given their total working capital level. With all three ratios, lower figures indicate trouble with working capital and liquidity, while higher ratios indicate a company has high liquidity and efficiently manages its cash — or may need to think about returning more money to its investors.

Working capital example

Managers strive to balance incoming and outgoing payments in order to minimize net working capital and maximize free cash flow. Sports Management International (SMI) pays its athlete clients sooner than it collects on receivables from major sports franchises and needs a credit line to finance operations. Because it is a growing business, SMI is trying to shorten its working capital cycle and limit the interest expenses it faces from short-term financing.

Other Investing Terms

Bond

A bond is a form of debt capital instrument that is used to raise funds for the issuer. Here’s how bonds work.

Bear Market

The terms “bear market” and “bull market” don’t sound like they have anything to do with money. These terms compare the way the stock market reacts to economic and other conditions. “Bear market” describes a declining market in the same way that a bear slashes its paw downward. “Bull market” describes an improving market in […]

Expense Ratio

Mutual funds and exchange-traded funds charge shareholders fees determined by an expense ratio to cover annual operating expenses, such as administrative and management costs, distribution fees, shareholder services and marketing. The ratio reduces the fund’s return to the shareholder, so it is essential to note the value in the fund’s prospectus and understand how it […]

Futures

Futures are a type of financial contract commonly used to hedge an investment or speculate on market prices. Through clever use of these financial tools, it’s possible to minimize the risk of loss from unfavorable changes in the market, while capitalizing on potential gains. As with all forms of trading opportunities, it’s important to understand […]

More From Bankrate