Accounting ratio
Working capital
The amount of short-term finance available for day-to-day operations.
Worked example
Current assets RM30,000 − current liabilities RM15,000 = RM15,000.
How to interpret it
Positive working capital means short-term assets exceed short-term debts. Both too little and too much can be a problem.
Using it in analysis
Working capital is the amount of short-term finance left to run the business once immediate debts are covered. Follow it across several years and set it beside the size of the business.
Positive working capital means current assets exceed current liabilities, so there is a cushion for wages, suppliers and other running costs. A rising figure can show a stronger position, but one that grows too large may mean cash, inventory or receivables are piling up unused. Negative working capital is a serious warning that the business may struggle to pay its short-term debts.
Example: current assets of RM90,000 and current liabilities of RM55,000 give working capital of RM35,000. A year later current assets have fallen to RM70,000 and current liabilities risen to RM68,000, leaving only RM2,000. The cushion is almost gone. One unexpected demand, such as a supplier wanting early payment, could leave the business unable to pay. This is a warning even if the business is still making a profit.
Common mistakes: assuming more working capital is always better, since too much can mean excess stock, slow-paying customers or idle cash. Treating working capital as profit is another error, because a profitable business can still run short if cash is tied up in stock and receivables. As an amount, it is hard to compare between businesses of different sizes. RM35,000 may be generous for a small shop but thin for a large one. It is a snapshot at one date, and slow-moving stock and doubtful debts are counted at full value.
Read it with the current ratio, which expresses the same relationship as a proportion. Two businesses may each have RM20,000 of working capital, but if one has current liabilities of RM10,000 and the other RM200,000, their positions are very different. Adding the acid-test ratio then shows how much of the cover depends on inventory.
Limitations
It is an absolute figure, so the current ratio is often more useful for comparison.
Related ratios
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