What is working capital and how is it managed?

Working capital represents the difference between a company’s current assets, like cash, inventory, and receivables, and its current liabilities, such as payables and short-term debt. It measures a firm’s short-term financial health and operational efficiency. Positive working capital means the company can meet its short-term obligations, while negative working capital may indicate financial strain. Effective management involves balancing liquidity and profitability by optimizing inventory levels, accelerating receivables collection, and negotiating favorable payment terms with suppliers. Too much working capital may lead to idle resources, while too little may disrupt operations. Businesses often forecast working capital needs to avoid cash shortages. Strong working capital management ensures smooth day-to-day operations, maintains solvency, and supports business growth by freeing resources for investment or expansion.