Introduction to working capital

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}