Working capital is a measure of how liquid a company's assets are. That is, how easily they are convertible to cash to supply the day-to-day operational needs of the organization. As such, it provides a measure both of how efficient a company's operations are and how healthy its short-term finances are. Significant and sustainable working capital provides a company with the flexibility to expand and improve its operations as well as respond to changing economic circumstances.
Working capital is calculated by subtracting current liabilities (i.e., accounts payable) from current assets (i.e., accounts receivable and inventory). If liabilities exceed assets, the company is said to have negative working capital.
Working capital= [AR] + [Inventory] - [AP].