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Working capital (definition): Its relationship to current liabilities and current assets

Working capital is what remains on the balance sheet after the current liabilities are subtracted from the current assets.

This is an indicator of how well the company can meet its financial obligations and therefore how solvent or liquid (able to convert assets to cash) the company is. With assets exceeding liabililites, the company is in a liquid position.

If you hope to borrow money for your company, potential lenders will examine your working capital to assess the health of your ratio of current assets to current liabilities.

Working capital formula

Working capital = Current assets – current liabilities


Plant, Albert C. (2007). The retail game: playing to win: a guide to the profitable sale of goods and services.Vancouver: Douglas & McIntyre Ltd. p. 214.
Pratt, Jamie. (2003). Financial Accounting in an Economic Context. New York: John Wiley & Sons. p. 769.