Video:How to Calculate Working Capital

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Transcript:How to Calculate Working Capital

Why Should One Calculate Working Capital?

The number one reason most people look at a balance sheet is to find out a company's working capital or position. It reveals more about the financial condition of a business than almost any other calculation.

By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.

Tips for When You Calculate Working Capital

To calculate working capital is the easiest of all the balance sheet calculations. One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills.

Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor -- all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

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