Skip main navigation

Introduction to working capital

Introduction to working capital
3.7
Working capital is a measure of liquidity or your company’s ability to convert assets into cash quickly. Liquid assets include cash, marketable securities, accounts receivable, and inventory. These items make up current assets on your business balance sheet. Current assets are offset on the balance sheet by current liabilities. These are notes due within the next 12 months. This might include accounts payable, short-term notes payable, such as a line of credit with a bank, income taxes payable, and the current portion of long-term debt, CPLTD.

Working capital measures liquidity. Liquidity is an organisation’s ability to transform assets into cash. Liquid assets can be cash or a resource that can be quickly turned into cash. Examples of liquid assets are marketable securities, inventory, accounts receivable, and, of course, cash itself. These are reflected in business balance sheets as current assets.

The opposite of current assets on the balance sheet are current liabilities. Current liabilities are notes due within the next year. This can include current portion of long-term debt (CPLTD), accounts payable, income taxes payable, and short-term payables (such as credit with a bank).

The amount of working capital in your balance sheet is dependent on your industry, similar to accounts receivable (AR). Despite this, a company should have liquid assets to cover its current liabilities in all instances.

Monitoring working capital allows you to keep an eye on company liabilities. If the amount of working capital falls, then your company is more leveraged. This means there are more liabilities and, subsequently, more risk. In general, slight leverage is to be expected, but too much can quickly become problematic.

Read the following article to gain further insights on working capital.

Read: (Optional)What is working capital [1]

References

1. Working capital explained [Internet]. Marketfinance. Available from: https://marketfinance.com/business-finance/what-is-working-capital

This article is from the free online

Financial Analysis for Business Decisions: Cash Flow Management

Created by
FutureLearn - Learning For Life

Our purpose is to transform access to education.

We offer a diverse selection of courses from leading universities and cultural institutions from around the world. These are delivered one step at a time, and are accessible on mobile, tablet and desktop, so you can fit learning around your life.

We believe learning should be an enjoyable, social experience, so our courses offer the opportunity to discuss what you’re learning with others as you go, helping you make fresh discoveries and form new ideas.
You can unlock new opportunities with unlimited access to hundreds of online short courses for a year by subscribing to our Unlimited package. Build your knowledge with top universities and organisations.

Learn more about how FutureLearn is transforming access to education