Working Capital

Working capital is defined as those funds a business has available to meet its day-to-day financial obligations. A sustainable business must have sufficient funds available at all times to meet its financial obligations as they become due. Working capital can be expressed in a layman's formula: 

Working Capital = Available funds - day to day financial obligations 

In accounting terms,

Working Capital = Current Assets – Current Liabilities

Current assets are items of economic value that can be converted into cash quite quickly in the accounting period (usually 1-3 months). These items typically include cash, inventory, accounts receivable (i.e. what customers owe to the business).

Current liabilities are monies that a business owes to external parties (not owners) and are due for payment within the current accounting period (usually within the next 12 months). These items are typically accounts payable (i.e. what the business owes to suppliers) plus other payables like income tax or council rates.