Working capital is the amount of current assets you have minus current liabilities at a certain snapshot in time. It’s like the balance sheet report, in that it measures something at a given moment in time instead of a change over a period of time. Working capital is a snapshot of the differences between assets and liabilities, but it’s important to say that it’s not just all assets minus all liabilities, just current assets minus current liabilities.
You can get these amounts from the company balance sheet. For example, your balance sheet reports a million dollars ($1,000,000) in current assets and five-hundred thousand dollars ($500,000) in current liabilities, the company’s working capital would be half a million dollars ($500,000).
[Example: working capital = $1,000,000 – $500,000 = $500,000]
If you have a significant amount of work in capital, you can still end up experiencing what they call a cash crunch or a shortfall. If your current assets are not in cash, but in the form of accounts receivable, then those payments will need to be collected in order to increase your working capital.
Another example would be if you had all of your assets in the form of buildings. Then you might have a situation where you have too few employees, but not enough services being provided to afford your building assets. You might want to think about selling some of your buildings and downsizing the physical building footprint of your business. In this case, you might have a lot of working capital, but still not be able to make payroll.
So you want to monitor your current assets on a regular basis and make sure that your cash flow is good. If you do that all the time then your financial issues will be better and you will not have upset employees.