working capital is a key figure that shows how much cash and cash equivalents a company has tied up in day-to-day operations. It is calculated as the difference between current assets and current liabilities:
Working capital = Current assets – Current liabilities
What does working capital consist of?
- Current assets: typically inventory, receivables from customers and cash.
- Current liabilities: accounts payable, payable costs and other debts due within one year.
Positive and negative working capital
En positive working capital means that the company has sufficient short-term assets to cover its short-term liabilities. It provides flexibility and security in daily operations.
En negative working capital means that current liabilities exceed current assets. This can create liquidity problems and, in the worst case, threaten the company's survival if it cannot pay its bills on time.
Significance for the company
Working capital is an important measure of the company's liquidity and operational reliability. Investors and banks often look at working capital to assess whether a company has a handle on its short-term finances. At the same time, it is a tool for management to manage how much capital is tied up in, for example, inventory and receivables.
Example
A company has:
- Current assets of 2 million DKK
- Short-term debt of DKK 1.5 million. DKK
Working capital = 2,000,000 – 1,500,000 = DKK 500,000.
The company therefore has DKK 500,000 in free working capital to finance its operations and unforeseen expenses.