Working capital plays a key role in financial analysis because it shows the short-term health of a company. It tells us whether a business can pay its day-to-day expenses, like salaries and bills, using its current assets. Positive working capital means the company is in a good position to manage its operations smoothly, while negative working capital shows financial pressure.

What is Working Capital in Simple Terms?

Working capital is the difference between a company’s current assets and current liabilities. It shows how much money is available to run the daily operations of the business. If the company has more current assets than current liabilities, it means the working capital is positive and the company is in a healthy position.

Why is Working Capital Important in Financial Analysis?

Working capital is important in financial analysis because it helps measure a company’s short-term strength. It tells if the company can meet its current financial needs. Investors and analysts use it to know whether a business can survive and grow without running out of cash in the short term.

How Do You Calculate Working Capital?

Working capital is calculated using a simple formula: Current Assets – Current Liabilities. For example, if a company has ₹10 lakhs in current assets and ₹6 lakhs in current liabilities, then its working capital is ₹4 lakhs. This shows the amount available for daily operations.

What Does Positive and Negative Working Capital Mean?

Positive working capital means the company has more current assets than current debts, which is good. It can easily run daily operations. Negative working capital means the company has more current liabilities than current assets, which could lead to payment problems and poor financial health.

How Does Working Capital Affect Business Growth?

Working capital supports smooth business operations. If it is managed well, the company can buy raw materials, pay salaries, and handle bills on time. This helps the business grow without cash problems. Poor working capital can stop growth and affect daily activities.

How to Improve Working Capital in a Business?

To improve working capital, a business should collect payments faster from customers, reduce extra inventory, and delay some payments without penalties. Controlling unnecessary expenses and increasing sales also help improve the working capital position.