How is working capital defined?

Working capital is defined as the difference between current assets and current liabilities. This measure indicates a company's short-term liquidity and operational efficiency, revealing the amount of capital that is available for day-to-day operations.

When current assets exceed current liabilities, it suggests that a company can easily cover its short-term financial obligations with its short-term assets, which is a positive sign of financial health. Conversely, if current liabilities exceed current assets, the company may have liquidity issues and struggle to meet its obligations.

This definition highlights the importance of managing both current assets and current liabilities effectively to ensure that the business remains solvent in the short term.