Working Capital
The Accounting Equation is the main Accounting Formula that can be rearranged to determine the amount of assets that belong to the owner debt-free, or the net worth of the business: Main Accounting Equation
Similarly, Working Capital is an Accounting Formula that takes the difference between current assets and current liabilities to measure the immediate liquidity of the business. This Accounting Formula is mainly used to check current assets that can be converted to cash against current debts that may be coming due. It provides a comfort level of available resources to pay current liabilities. A negative result indicates a company may have trouble paying debts, and may be at risk of bankruptcy. The formula is more useful when compared with previous quarters or years. Declining figures may indicate a decline in sales, and thus a decline in Cash or Accounts Receivable. However, an increase in the number may indicate operating inefficiency. Increasing Cash Balances may indicate the company has not utilized cash effectively for growth. Increasing inventories may indicate slow Inventory Turnover and an inefficient use of cash tied up in inventory. Increasing Accounts Receivable balances may indicate increasing sales, but it could also indicate that more customers are not paying amounts due on time, which actually reduces the ability to pay debts due. For these reasons, it is important that the results of this measure are compared with past figures for the company. To view the Balance Sheet Example for Sunny Sunglasses Shop,
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