What Is Working Capital?

Working capital is the amount left when you subtract a company's current liabilities from its current assets. The more working capital a company has, the less financial problems it will face.

Similarly if the company has too much working capital than it needs to improve its utilization of resources

Working Capital

current liabilities are accounts payable, short-term loans, payroll taxes payable, and income taxes payable.

current asset are cash, accounts receivable, investments that can be liquidated, and inventory. I

How Do You Calculate Working Capital?

Working capital = Current assets - Current liabilities

Example of the Working Capital Ratio

The following information is available about a company:

                                                      Company A                  Company B      Company C

Current assets                                AED1,000,000                     AED 2,000,000         AED3,000,000

Current liabilities                             AED 500,000                    AED 500,000            AED 4,000,000

Working capital ratio                      2:1                             4:1                       0.75:1

The working capital ratio for the Company A is considered to be within industry standard. The Company B has excess working capital. It means Company B is not using its resources efficiently. The Company C working capital ratio is below industry standard. The company needs to improve its assets.