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Professionals, please do not write as "Excess of current assets over current liabilities". Based on the answers that I receive, I can propably share a fantastic answer given by one of my Tutor. I have similar type of interesting questions with answers to give you on Ratio analysis.
Working capital indicates short term financial health of company. It also shows, how much money is blocked in receivables, stocks, advances etc. which can help pay off the short term debts. If too much of receivables or stocks are held, then there is a scope to improve the efficiency. On other hand, if stocks, debtors, cash are too less tp pay off creditors then there is a serious problem on financing or sales drop.
It has to be seen in context of liquid ratio to have better understanding.
Short term,Fund Available and which will be used for day to day operation.Its portion of asset,but which will be used in current business operation.These fund araise during the current business operation period.
Instead of saying like this, we can also say like, "the portion of Long term funds (capital/Long term loan/Debt financing) used for Current operations is working capital. You can draw a Balance sheet, classify assets as Current & Fixed (long term) then classify on the other side liabilites as Current & Long term. Using your current liabilities, you get current assets and ofcourse the margin on credit sale what you do also will be there in the receivables. but working capital always is not equal to the margin it will always differ. if it is excess by more than that, then the funds should have come from long term payables only. If the WC is negative, then the company or individual used their short term financing (like accounts payable, short term loan) to buy property or invest in long term investments. This will give cash issues in the short run and in turn it will affect the current operations. Eg. using credit card to buy land or long term assets. that is why negative w.capital is treated as dangerous. Dont you think, this is also relevant for explaning WC concept. please comment!
