Working capital is a measure of a company's financial health and refers to the amount of money a business has available to meet its short-term obligations. It represents the difference between a company's current assets, such as cash, accounts receivable, and inventory, and its current liabilities, such as accounts payable, taxes payable, and short-term debt.

Working capital is a critical factor in a company's ability to manage its day-to-day operations. A positive working capital means that the company has enough current assets to cover its current liabilities, and it can meet its obligations as they come due. On the other hand, if a company has a negative working capital, it suggests that it might face difficulties in fulfilling its short-term liabilities, and it might have to depend on external financing to sustain its activities.

A company's working capital can be calculated using the following formula:

Working Capital = Current Assets - Current Liabilities

Current assets encompass those assets that are anticipated to be converted into cash within a year or the business's operational cycle, whichever extends beyond a year. Cash and cash equivalents, accounts receivable, inventory, and prepaid expenses are some illustrations of current assets.

Conversely, current liabilities are those obligations that must be fulfilled within a year or the business's operational cycle, whichever is greater. Examples of current liabilities include accounts payable, accrued expenses, taxes payable, and short-term debt.

A positive working capital means that the company has more current assets than current liabilities, which indicates that it can meet its short-term obligations without the need for external financing. If a company has a negative working capital, it implies that it possesses more current liabilities than current assets, suggesting that it may encounter difficulties in fulfilling its short-term obligations and might have to depend on external financing to sustain its activities.

Managing working capital is essential for any business, and it requires careful management of both current assets and liabilities. Companies can improve their working capital by increasing their cash reserves, improving their collections of accounts receivable, managing their inventory levels effectively, and negotiating favorable payment terms with suppliers.