Glossary - Working Capital
Working capital refers to the difference between a company's current assets and current liabilities. It is a crucial financial metric used to measure a company's operational liquidity, efficiency, and overall health. Adequate working capital indicates that a company can fund its day-to-day operations and has sufficient funds to satisfy both short-term obligations and operational expenses.
Also known as
- Net Working Capital
- Working Capital Ratio
Use cases examples
- Financial Statements: In the balance sheet, working capital is calculated by subtracting current liabilities from current assets.
- Loan Agreements: Borrower shall maintain a minimum working capital of $500,000 as a covenant of this loan agreement.
Considerations for investors
- Investors should evaluate a company's working capital to assess its ability to survive short-term uncertainties and to ensure it can make good on its financial obligations.
- A company's working capital trends can provide insight into its operational efficiency and financial health over time.
Considerations for founders
- Understanding and managing working capital is essential for maintaining operational liquidity without needing to resort to external financing.
- Effective working capital management can improve a company's profitability and reduce its risk of bankruptcy.
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