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Calculate the net working capital of Curzon Florists, when:
Working capital = asset value – value of liabilities = $5 million - $3 million = $2 million
Calculate the working capital of Raphaelson Travel, when:
A company can have assets and be profitable but be unable to convert assets quickly to pay its debts. Working capital measures liquidity, the ease with which assets can be converted into cash. Working capital management involves making choices related to a firm's short-term assets and short-term liabilities. Its goal is to ensure that a business can continue operating and has enough cash flow to pay for maturing short-term debt and future operating expenses. If a business’ current asset value is less than that of its current liabilities, it has a working capital deficiency, also called a working capital deficit.
Working capital is the value of current assets minus the value of current liabilities.
Analysts and company managers use working capital values to measure debt risk. That is, if a company’s current asset value is greater than the value of its current liabilities the working capital is positive. This tells managers that the company is not expected to suffer from a liquidity problem in the near future. However, if the current asset value is less than current liabilities, working capital is negative. This alerts managers that the business might not be able to pay off its current liabilities when they come due.