Interpretation of Accounts Using Simple Accounting Ratios Equity: Working Capital - SS2 Accounting Lesson Note

Working capital is the amount of money a business has available to fund its day-to-day operations. It is calculated by subtracting a company's current liabilities from its current assets. Current assets include cash, inventory, accounts receivable, and other assets that can be quickly converted into cash, while current liabilities include accounts payable, taxes due, and other expenses that the business needs to pay within a year.

Working capital is important because it helps businesses cover their short-term expenses, such as payroll, rent, and supplier payments. Without enough working capital, a business may struggle to pay its bills and could even face bankruptcy.

Managing working capital effectively is crucial for a business's success. Too much working capital can tie up resources that could be used for growth and investment, while too little can lead to cash flow problems and missed opportunities. By monitoring their working capital regularly and making strategic decisions about financing, inventory, and other expenses, businesses can optimize their cash flow and ensure they have the resources they need to operate efficiently and grow over time.