what is the utility of working capital given an example
Answers
Working capital, also called net working capital, is simply the difference between a company's current assets and current liabilities. Working capital reflects the amount of money a company has at its disposal to pay for immediate expenses.
Since working capital is equal to current assets minus liabilities, it can be either a positive or a negative number. Of course, positive working capital is always preferable because it means a company has more money than it needs at a given moment. However, since the net working capital figure changes over time, as current assets and liabilities are based on a rolling 12-month period, even a healthy company may experience periods where its working capital is negative if it has unexpected short-term expenses.
Conversely, a company that has consistently excessive working capital may not be making the most of its assets. While positive working capital is always a good thing, having a lot of cash on hand may mean the company is not investing its extra funds in the most lucrative manner possible.