Formula for Working Capital
Working capital is a key indicator of a company’s financial position and liquidity, which provides business stakeholders with an eagle-eye view of the company’s performance and helps them in their decision-making. The following is the formula to calculate working capital:
Working Capital = Current Assets – Current Liabilities
Let’s take a working capital example to understand this concept.
Case: GFG Pvt. Ltd., a company involved in providing technical consultancy services. The following figures were disclosed in their financial statement:
- Current assets, including marketable securities worth ₹12,50,000,
- Current liabilities amount to ₹8,00,000.
You are required to calculate the working capital of GFG Pvt. Ltd. and comment on the result.
Solution: Working Capital = Current Assets minus Current Liabilities
Working Capital = ₹12,50,000 – ₹8,00,0000
Working Capital = ₹4,50,000
This suggests that GFG Pvt. Ltd. has an excess of current assets over current liabilities by ₹4,50,000. Also, they can pay off their current dues and finance their day-to-day business obligations.
What is Working Capital? – Formula, Components, Limitations
Working Capital represents the firm’s holdings of assets like cash, marketable securities, receivables, etc. Funds, being the backbone of any efficient business, are the most important aspect to be managed. Careful maintenance of the working capital and fund mix to acquire are key areas of decision-making and are important as they help to meet any business contingencies.
From an accounting perspective working capital is the difference between the short-term sources of funds, i.e., the current assets, and the short-term financial obligations, i.e., the current liabilities. In this article, we are providing you with all the information regarding working capital and its formula, components, and limitations.
Table of Content
- Working Capital
- Components of Working Capital
- Formula for Working Capital
- Significance of Working Capital
- Advantages of Working Capital
- Limitations of Working Capital
- FAQs on Working Capital