Working capital describes capital (usually cash) as it moves through a business. It first flows from a company to pay for supplies, materials, finished goods inventory and wages to workers who produce goods and services. It then flows into a company as goods and services sold as well as through new investment equity and received loans. Each stage of this cycle consumes time. The more time the stages consume, the greater the demands are on working capital.
The formula for working capital can be expressed as:
Current Assets - Current liabilities = Working Capital
Current assets - What can be converted to cash within one year or a normal operating cycle.
Current liabilities - Monies owed that are due within one year.
Example:
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If a company's current assets total $300,000, and
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Its current liabilities is $160,000;
Then its working capital is:
$300,000 - $160,000 = $140,000