what is working capital 
working capital also known as net working capital nwc is the difference between a company s current assets like cash accounts receivable customers unpaid bills and inventories of raw materials and finished goods and its current liabilities such as accounts payable and debts it s a commonly used measurement to gauge the short term financial health and efficiency of an organization investopedia yurle villegasunderstanding working capitalworking capital is calculated from the assets and liabilities on a corporate balance sheet focusing on immediate debts and the most liquid assets calculating working capital provides insight into a company s short term liquidity and efficiency a company with positive working capital generally has the potential to invest in growth and expansion but if current assets don t exceed current liabilities the company has negative working capital and may face difficulties in growth paying back creditors or even avoiding bankruptcy in corporate finance current refers to a time period of one year or less current assets are those that can be converted into cash within 12 months while current liabilities are obligations that must be paid within the same timeframe 2the amount of working capital needed varies by industry company size and risk profile industries with longer production cycles require higher working capital due to slower inventory turnover alternatively bigger retail companies interacting with numerous customers daily can generate short term funds quickly and often need lower working capital working capital formulato calculate working capital subtract a company s current liabilities from its current assets both figures can be found in public companies publicly disclosed financial statements though this information may not be readily available for private companies working capital current assets current liabilitiesworking capital is often expressed as a dollar figure for example if a company has 100 000 in current assets and 30 000 in current liabilities it has 70 000 of working capital this means the company has 70 000 at its disposal in the short term if it needs to raise money for any reason a business can either have positive or negative working capital it s worth noting that while negative working capital isn t always bad and can depend on the specific business and its lifecycle stage prolonged negative working capital can be problematic components of working capitalworking capital consists of current assets and current liabilities a company s balance sheet contains all working capital components though it may not need all the elements discussed below for example a service company that doesn t carry inventory will simply not factor inventory into its working capital calculation current assets are economic benefits that the company expects to receive within the next 12 months the company has a claim or right to receive the financial benefit and calculating working capital poses the hypothetical situation of liquidating all items below into cash current liabilities encompass all debts a company owes or will owe within the next 12 months the overarching goal of working capital is to understand whether a company can cover all of these debts with the short term assets it already has on hand theresa chiechi investopedia 2019limitations of working capitalworking capital can be very insightful in determining a company s short term health however some downsides to the calculation can make the metric sometimes misleading here are four limitations of working capital special considerationsmost major new projects like expanding production or entering into new markets often require an upfront investment reducing immediate cash flow therefore companies needing extra capital or using working capital inefficiently can boost cash flow by negotiating better terms with suppliers and customers companies can forecast future working capital by predicting sales manufacturing and operations forecasting helps estimate how these elements will impact current assets and liabilities on the other hand high working capital isn t always a good thing it might indicate that the business has too much inventory or isn t investing excess cash alternatively it could mean a company fails to leverage the benefits of low interest or no interest loans another financial metric the current ratio measures the ratio of current assets to current liabilities unlike working capital it uses different accounts in its calculation and reports the relationship as a percentage rather than a dollar amount example of working capitalas of march 2024 microsoft msft reported 147 billion of total current assets which included cash cash equivalents short term investments accounts receivable inventory and other current assets 3the company also reported 118 5 billion of current liabilities which comprise accounts payable current portions of long term debts accrued compensation short term income taxes short term unearned revenue and other current liabilities 3therefore as of march 2024 microsoft s working capital metric was approximately 28 5 billion if microsoft were to liquidate all short term assets and extinguish all short term debts it would have almost 30 billion remaining cash 