Working Capital

Definition

The difference between the current assets of the business and its current liabilities.

What It Means

Working capital represents the funds required to conduct daily business operations. It shows what readily available resources the business has at its disposal in order to meet the obligations coming due in the short term. The ratio of the current assets divided by current liabilities is known as the current ratio. It represents a key liquidity measure of business solvency.

Accounting for adequate working capital is an essential element of buying a small business. For many small businesses, the working capital needs change throughout the year. As a business buyer you need to determine what these seasonal fluctuations are, and provide for sufficient working capital at all times.