Working capital is calculated by subtracting current liabilities from current assets, as listed on the company’s balance sheet. Current assets include cash, accounts receivable and inventory. Current liabilities include accounts payable, taxes, wages and interest owed.
Positive working capital helps plan for future needs and ensure the company has enough cash and cash equivalents meet short-term obligations, such as unpaid taxes and short-term debt whereas negative working capital shows company doesn’t have enough funds to meet short term obligations.
Companies need to optimise the use of working capital. Some of the ways of improving working capital are as under:
