Working Capital is an important concept for every business to understand. From Amazon or Apple to a small locally owned business, business owners need to understand the importance of working capital. At its heart, working capital is defined as, “the amount of a company’s current assets minus the amount of its current liabilities,” or simply, a company’s available capital for daily operations at any given point in time. Thus, working capital provides a measurement to determine a company’s operational efficiency and short-term financial health.
At the basis of working capital is the calculation, which is generally the difference between the current assets and the current liabilities. Current assets are assets that can be converted into cash within one year or less. This would include assets such as cash equivalents, marketable securities, accounts receivable, inventory, and prepaid expenses. While current liabilities include short term debt such as accounts payables, accrued liabilities, and other similar debts. Subtracting the current assets by the current liabilities will provide the working capital figure. The working capital is positive when there is an excess of current assets compared to current liabilities.
However, a working capital calculation not only plays a role as a financial measuring tool, but it can play a large role in Merger and Acquisition (M&A) transactions.
