Total working capital represents a company's assets minus its liabilities. It helps determine a figure of all the liquid capital a company has and is usually used when a company is seeking to expand operations. This number can be positive if the company has come capital to work with, or it can be negative if the company has many debts. If a company has a great deal of total working capital available, it may indicate the company is ripe for growth. Total working capital figures can also be called net current asset calculations or simply current capital.
Generally, an asset is anything that increases the value of the company and can include stocks and bonds, real estate investments, as well as all important liquid capital. Liquid capital is usually money, but can be other merchandise that a business reliably uses in trade. Non-liquid capital includes real estate, vehicles, and any other assets that cannot be quickly and easily traded or sold. In addition to investments, other assets a company may hold include its facilities, equipment, and trade secrets.
Liquid capital is necessary when running a business. It is the money used to pay short-term debts like those owed to suppliers of materials for manufacturing. Lack of total working capital can cause a business to lag in paying supplier debt, and the business may suffer without enough total working capital to pay vendors or bargain for deals on supplies. In industries in which materials are in high demand, slow payment can harbor poor vendor relations and affect the company's ability to acquire quality materials.
Liabilities are often debts, but not always. In businesses, a liability that affects total working capital can also include pending lawsuits or known losses the company will suffer in the future, like the aftermath of bad investments. As liabilities often come with tacked-on costs like interest and fees, reducing debts is one of the most effective ways of eventually increasing working capital. The other way to grow total working capital is to increase profits.
Working capital can be a strong indicator of whether a company is ready to expand. If a company does not have a significant amount of total working capital, it will not have the money to pay for the costs associated with expanding business. Other indications that a business is ready to expand include a strong team of employees and access to equipment that can handle an expansion in the company.
