What is Working Capital (WC)?
Working Capital (WC) is calculated by subtracting a corporation’s current liabilities from its current assets. This financial metric determines a corporation’s operating liquidity and is necessary in understanding how readily available funds are for necessary financial transactions related to daily operations. A corporation whose current liabilities are more than its current assets is considered to have a working capital deficiency.
Working Capital (WC) is calculated as follows:
Working Capital = Current Assets – Current Liabilities
The danger of having negative working capital is that a corporation may be unable to meet its short-term liabilities. Examples of current assets are cash, accounts receivables and inventory. These assets are easily liquidated for the purpose of raising funds. If a corporation is unable to meet its short-term obligations, then in a worst case scenario, bankruptcy may be a threat. In addition, negative working capital may also be a sign of trouble ahead. If negative working capital remains over a long period of time, this may be an indication that sales volumes are on the decline.