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Working Capital

Working Capital

Working Capital is Current Assets minus Current Liabilities

On December 1st John buys $20,000 worth of shoes to sell to customers. The bill will be due on January 1st. On December 15th John sells the shoes on credit for $45,000. John will receive the money for the shoes on January 15th. Even though John sold the shoes at a big profit, when January 1st comes around he will be in big trouble. He will have a $20,000 bill and no way to pay it because he hasn’t yet received the money from the sale of the shoes. John should have put some of his own money in the bank so he would have funds to pay his bills. He could have used that money to pay the bill until his customer paid him. The extra money he put in the bank would be working capital, insuring that he had more short term assets than short term liabilities so he could pay his bills.

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