working capital
The difference between a company's current assets and current liabilities, representing the capital available for day-to-day operations.
Example
“The restaurant had $50,000 in working capital to cover payroll and food costs.”
Memory Tip
WORKING capital is the money that WORKS for you every day — paying bills, buying inventory.
Why It Matters
Working capital determines whether a business can pay its bills and fund daily operations without borrowing money. For personal finance, understanding this concept helps you evaluate if a company you invest in or work for has enough liquid resources to survive unexpected challenges or downturns.
Common Misconception
Many people think working capital is the same as profit or net income, but it actually measures liquidity and operational efficiency rather than profitability. A company can be profitable on paper yet still struggle with cash flow if its working capital is negative.
In Practice
Imagine a retail store with current assets of 150,000 dollars including cash and inventory, and current liabilities of 100,000 dollars in accounts payable and short-term loans. This store has positive working capital of 50,000 dollars, meaning it has sufficient funds to restock inventory, pay employees, and handle unexpected expenses without immediately seeking additional financing.
Etymology
Working (actively operating) + capital — the capital that is actively working in the business.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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