What is Working Capital?
Working capital or WC is the amount of money, which the new businesses borrowed and used from the bank or other, certified lenders. The borrowed monetary amount is for keeping the business operations going. It is also allocated for the payment requirements or business bills for a particular startup period. This is necessary especially if the business is still initializing its operations and the income is basically lesser than the expenses incurred.
For most new and budding enterprises, the amount of working capital they have is actually the determining factor that could distinguish either the success or failure of the business. The WC is the financial metric, which represents operating cash liquidity concept. It is not only available for businesses and organizations but other entities such as government-related.
There is also a term called net working capital, which is the calculation of the current assets minus the current liabilities. This is derived from the valuation techniques such as Discounted Cash Flows or DCF. You could efficiently measure the WC of a particular entity or business through subtracting the liabilities from its current assets. Those who basically have higher working capitals are much more positioned for success than others. WC is the liquid assets, which are needed and realistically available for the expansion of the business operations.
Working capital is expressed as negative or positive number. Companies, which have more debts than their current assets, have negative WC. Those that have current assets that outweigh their debts have positive WC.
In order to ensure the success of the enterprise, you must first ensure your working capital. New businesses may not properly function at all and it could not guarantee the company to grow and prosper. In fact, if a company has very little working capital, the worse scenario could even lead to bankruptcy.