Working capital is an important financial measurement used to analyze the financial position or strength of the company. Working capital is mostly used to find out the relationship between current liabilities and current assets. Actually, working capital is the excess of current assets over current liabilities. The common formula for working capital is given as:
Current Assets – Current Liabilities
For example, Bobby Shan Company has current assets of $500000 and the current liabilities of $300000. Therefore working capital of the company will be $200000 ($500000 – 300000).
The size of working capital for any firm depends on the nature of its business activities and the size of company. Financial analysts who are familiar with organization and its operations can easily identify the financial position of the company. They can easily recognize whether the organization is in a good financial position or is likely to encounter financial difficulties from the figure of its working capital.