Working capital is widely used figure, not only for the company’s liquidity, but also for its operational efficiency and overall financial health. The company’s working capital is the capital required in order to function on a daily basis, as it requires a certain amount of cash to cover unexpected expenses, to make regular payments and purchases of raw materials used in production.
Working capital as a measure of liquidity
Working capital-the difference between current assets and current liabilities. The ratio of own working capital indicates to analysts the company’s liquidity or cash flows sufficient to meet all its short-term obligations and expenses. It is calculated by dividing current assets by current liabilities.
Working capital necessary to operate a business depends on the industry. A number of factors influence working capital, including the purchase of assets overdue receivables (AR) has been decommissioned and the differences in payment policies.
Working capital reflects the various activities of the company such as debt management, collection of revenue, accounts payable and inventory management. These activities are reflected in working capital, as it includes not only cash but also accounts payable (AP) and AR, inventory, part of the debt in one year and some other short-term accounts.
For the company, liquidity is essentially a measure of its ability to repay its liabilities when they are due, or how easily and efficiently a company can use these funds to cover their debts. Working capital reflects the liquid assets that the company uses to make these debt payments.