MaRS Library 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.
- Key documents for investors and financing: Subscription and shareholder agreements.
- Business entity concept.
- Biotech and patents: Prior art and freedom-to-operate searches.
- What legal agreements do startups need for founders, shareholders and investors?.
- Keep business and personal finances separate: Avoid common accounting mistakes.