BQLearning: What Is Working Capital?
BQLearning is a show that seeks to demystify financial markets, economic theories, legal processes and political structures. This series focuses on financial market jargon.
Working capital is the money required to run the day-to-day operations of a business. It is a measure of a company’s operational efficiency and short-term financial health.
The working capital ratio – the ratio of current assets to current liabilities – indicates whether a company has enough short-term assets to take care of short-term debts. Ideally, a company’s assets should be more than its liabilities. If liabilities exceed assets, it may have trouble paying back creditors. There’s also the risk of bankruptcy.
Anupam Gupta, independent consultant at Aavan Research, explains why it is vital that businesses have adequate working capital.