What are the components of working capital?

The components of working capital are current assets and current liabilities.

Working capital, often referred to as net working capital, is a measure of a company's operational liquidity and short-term financial health. It is calculated by subtracting current liabilities from current assets. The two main components of working capital are therefore current assets and current liabilities.

Current assets are the resources that a company expects to convert into cash within one fiscal year or operating cycle. They include items such as cash, marketable securities, accounts receivable, and inventory. Cash is the most liquid asset and can be used immediately to pay off liabilities. Marketable securities are investments that can be converted into cash quickly. Accounts receivable represents the money owed to the company by its customers. Inventory includes raw materials, work-in-progress, and finished goods that the company intends to sell.

On the other hand, current liabilities are the company's debts or obligations that are due within one fiscal year or operating cycle. They include items such as accounts payable, short-term loans, and accrued expenses. Accounts payable represents the money the company owes to its suppliers. Short-term loans are debts that must be repaid within a year. Accrued expenses are liabilities that have been incurred but not yet paid.

The balance between these two components—current assets and current liabilities—determines the amount of working capital a company has. A positive working capital indicates that a company has enough assets to cover its short-term liabilities, which is a sign of financial stability. Conversely, a negative working capital suggests that a company may struggle to meet its short-term obligations, indicating potential financial difficulties. Therefore, understanding the components of working capital is crucial for assessing a company's liquidity and overall financial health.