Working capital - SS2 Commerce Lesson Note

Working capital refers to the amount of money or resources that a company has available to carry out its day-to-day operations. It is a measure of a company's short-term financial health and its ability to meet its immediate obligations.

Working capital is calculated by subtracting a company's current liabilities (such as short-term debts, payments due to suppliers, and other obligations) from its current assets (such as cash, accounts receivable, inventory, and other assets that can be easily converted into cash within a year).

The primary purpose of working capital is to ensure that a company has enough funds to cover its short-term expenses, such as paying employees' salaries, purchasing inventory, and meeting other operating costs. It provides the company with the necessary liquidity to keep its operations running smoothly.

Having sufficient working capital is important for a company to avoid disruptions in its operations and maintain a healthy cash flow. It allows a company to take advantage of business opportunities, handle unexpected expenses, and manage fluctuations in customer demand. Insufficient working capital can lead to cash flow problems, difficulty in paying bills, and potential financial distress.