© 2015 Shmoop University, Inc. All rights reserved.

CHECK OUT SHMOOP'S FREE STUDY TOOLS:

Essay Lab | Math Shack | Videos

Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Working Capital

Definition:

The difference between a company's current assets and current liabilities. This is a measure of liquidity; does the company have enough of a cushion to satisfy its short-term cash needs? You might think the higher the "better" but too much working capital might mean that the company isn't utilizing its assets as efficiently as it could.

Example

Okay, you're at the prototypical lemonade stand. It's a special lemonade that has to cure for exactly 100 days before it's just bitter enough to be called Miss Havisham's Lemonade. 

You know that you sell on average 500 glasses a day so you have to stockpile the lemonade for 3+ months before the day comes when you'll serve it. And bitter lemonade ain't free. In fact, it costs you about a dime a glass, with all the sugar you use to combat the bitterness. Even at just a dime, that's 50 bucks a day (a dime times 500 glasses) times 100 days. It totals to 5 grand of stored lemonade. 

Then there's the fridge you have to rent to keep it cold. And insurance and cups and a whole bunch of other stuff. How'd you get the 5 going on 10 grand in cash to pay for all of this? Well, you may have borrowed it; you may have sold a slice of your equity pie to raise it—but you have it all now. 

So what's the fancy accounting term for the cash that went in to getting all of your bitterness? Yes, working capital. It's uh...capital...that let's you...work.

Advertisement