What is Working Capital?
- An entity’s working capital (also called “net current assets”) is the the total current assets less the total current liabilities of that entity.
- Working capital
An entity (company, person, NGO, etc.) can have many assets and even be profitable, but be brought to its knees because it does not have sufficient working capital.
Managing an entity’s working capital is part of managing its cash flow.
The working capital of an entity tells you a lot about how capable that entity is of meeting it’s day-to-day obligations and paying its short-term debts.
An entity that doesn’t have sufficient working capital may not be able to pay for essential goods and services it needs to operate, it may not be able to pay its creditors, or it may not be able to take advantage of opportunities that require cash.
In extreme cases, an entity can even have a working capital deficiency.
- An entity has a working capital deficit if its current assets are less than its current liabilities.
- Working capital deficit
An entity that has a working capital deficit is usually an entity that is in trouble. Such an entity will be forced to liquidate (sell) some of its fixed assets and/or long-term investments, in order to pay its short-term debts.
This definition is part of the Dictionary of Financial Terms. If you want to receive a notice every time a new definition is published, you can subscribe to Liberta.
