Working capital is the excess of a company’s current assets over its current liabilities. This figure quickly measures the company’s short-term liquidity.
For example, if a company has current assets of $80,000 and current liabilities of $50,000, the working capital amount is a positive $30,000. Theoretically, if the company needed to pay all its short-term debts quickly, it would have sufficient current assets to cover the debts.
However, the metric is not perfect because current assets may include amounts that are not readily convertible to cash. For example, a company may have delinquent accounts receivable that are not collectible from a customer.
Current assets may include, but are not limited to, some of the following assets:
- Cash
- Cash Equivalents
- Accounts Receivable
- Deposits
- Prepaid Expenses
- Inventory
Current liabilities may include, but are not limited to, some of the following debts:
- Accounts Payable
- Income Taxes Payable
- Credit Cards Payable
- Employment Tax Payable (FICA, SUTA, FUTA)
- Deferred Revenue
- Accrued Expenses
- Accrued Payroll
- Customer Deposits
- Current Portion of Long-Term Debts