Working capital is a simple but powerful financial metric. It tells you whether a company has enough short-term resources to cover its short-term obligations. The formula is straightforward: Working Capital = Current Assets - Current Liabilities.
If a company has $500,000 in current assets (cash, inventory, receivables) and $300,000 in current liabilities (payables, short-term loans), its working capital is $200,000. That is a healthy cushion.
Positive working capital means the business can pay its bills and invest in growth. Negative working capital is a warning sign — it means the company might struggle to meet its obligations and could face a cash crunch.