Question

(a) What is meant by working capital? (b) Why is an analysis of working capital important? (c) Do a little research to show an example of a corporation with weak or strong working capital and why?

Answer 1

(a) Working capital = Current Assets - Current liabilities

It is the capital of the business that it requires to carry out the day to day operations of the business.

Analysis of working capital is important because working capital helps determines the operating efficiency, liquidity and the short term financial health of the business. If the working capital of the company is low , this means that the business does not have sufficient current assets to meet the day to day operations of the business.

A strong working capital means that the business has sufficient current assets to meet the current liabilities.

For example let us take the example of Apple Inc,

Current assets = $131,339

Current liabilities = $116,866

So, working capital = $14473

So, Apple has a weak working capital because it does not have sufficient current assets to pay off the liabilities which will come due.

Now, let us take example of Berkshire Hathaway

Current assets =$182,446

Current liabilities = $50,271

So, working capital = $132175

This is a company having a strong working capital,as it has sufficient assets as a cushion to pay off the current liabilities.