# What is working capital?

**Working capital** is a financial metric that displays a company’s short-term liquidity and the ability to meet its day-to-day operational expenses.

It reflects the cash available after accounting for current liabilities from a company’s current assets.

Working capital can be either positive or negative:

- Positive working capital indicates the company has sufficient current assets to cover its current liabilities. This suggests a healthy financial position and the ability to meet short-term obligations.
- Negative working capital suggests the company’s current liabilities exceed its current assets. This indicates difficulty meeting short-term obligations or reliance on external financing. However, it can also be a strategic choice in some industries.

## Frequently asked questions

### What are some factors that can affect working capital?

The following factors affect working capital:

- Rapid sales growth can strain working capital as a company needs to invest more in inventory and receivables to meet customer demand
- Inefficient inventory management practices, like holding excess stock, can tie up cash and reduce working capital
- Longer credit terms offered to customers can lead to higher accounts receivable, impacting working capital

### How can companies improve their working capital?

Companies can improve their working capital by doing the following:

- Implementing strategies to optimize inventory levels can free up cash flow
- Encouraging faster payments from customers through early payment discounts or stricter credit policies
- Negotiating better payment terms with suppliers can extend the time frame for settling accounts payable, improving short-term liquidity