Significance of Working Capital
Negative working capital suggests that the company’s current assets are not sufficient to pay off current liabilities, and the company has more short-term debt than its short-term resources. Negative working capital is an indicator of poor short-term health, low liquidity, and a cash crunch.
Positive working capital suggests that the company’s current assets are greater than its current liabilities. The company has an excess of short-term resources over its short-term debt. Positive working capital suggests high liquidity and better financial well-being, as it is one of the indicators used by stakeholders to assess the financial well-being of a company.
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