Title: Does working capital measure liquidity?
Headings: Does Working Capital Measure Liquidity?
Does Working Capital Measure Liquidity?
Key Takeaways
Working Capital as a Measure for Liquidity
Drivers of Working Capital Liquidity
Current Assets
Current Liabilities
Interpreting Working Capital Liquidity
Positive Working Capital – Liquidity
Banks
Suppliers
Excessive Liquidity
Negative Working Capital – Inadequate Liquidity
Cash Outlays
Seasonal Businesses
Long-term Issues

Content: Accounts payable, which are debts owed to suppliers and vendors
Wages payable that are due to employees within the next year
Short-term debt, which includes bank loans used to fund the company's operating expenses
Dividends payable, which are cash payments due to equity shareholders as a reward for being an investor in the company
Current portion of long-term debt that's due in the next 12 months
Interest payable on outstanding debts, including long-term obligations
Income taxes due within the next year
Interpreting Working Capital Liquidity
Working capital is the measure of how well a company can sell its current assets to pay its current liabilities. For example, if a company has an accounts payable coming due in 30 days, the company could sell some of its merchandise inventory or withdraw cash from its marketable securities to satisfy the payable that's coming due. However, if that same company didn't have enough merchandise inventory, or any cash on hand, or marketable securities, it could run into difficulty paying its accounts payable. As a result, investors and equity analysts, as well as banks that extend credit to companies, analyze whether a company has the current assets to cover its current liabilities. Working capital reflects various company activities, such as debt management, revenue collection, payments to suppliers, and inventory management. These activities are reflected in working capital, as it includes not only cash but also accounts payable, accounts receivables, inventory, and portions of debt due within one year. For example, a company can improve its working capital by collecting their accounts receivables from their customers sooner or asking suppliers for a short-term extension on the due dates for their accounts payables. A number of factors affect working capital needs, including asset purchases, past-due accounts receivable being written off, and differences in payment policies. However, it's important to remember that the working capital needed to operate a business varies between industries. Positive Working Capital – Liquidity
A company that has an excess of current assets to meet its current liabilities has positive working capital.