Question

What is working capital? How can it be used to assess the company's liquidity performance. Explain your answer in at least 500-600 words.

Answer 1

Working capital is basically an indicator of the short term financial position of an organisation and also a measure of its overall efficiency.Working capital is obtained by subtracting the current liablities from the current assets.This ratio indicaates whether the company possess sufficient assets to cover its short term debt.

Working capital is a commonly used metric,not only for a company's liquidity but also for it to function on a daily basis,as it requires a certain amount of cash on hand to cover unexpected costs,make regular payments and buy raw materials used in production.

Working capital is the difference between a company's current asset and current liablities.The working capital ratio indicates to analysts the company's liquidity or whether it has cash flow adequate enough to meet all its short term liablities and expenses.It is calculated by dividing current assets by current liablities.

The working capital needed to operate a business varies between industries.A number of factors afffect working capital needs,including asset purchases,past due accounts receivable being written off and difference in payment policies.

Working capital reflects various company activities,such as debt management,revenue collection,payments to suppliers and inventory management.These acivities are reflected in working capital as it includes not only cash but also account payable and accounts receivable,inventory,portion of debt due within one year and some other short term accounts.

For a company. liquidity essentially measures its ability to pay off its liablities when they are due,or how easily and effectively a company can access the money it needs to cover its debts.Working capital reflects the liquid assets a company utilizes to make such debt payments.