• Working capital is the funds available for the short term financial commitments of a business.
• Short-term liquidity is important for businesses. It means a business can take advantage of:
  • Opportunities when they arise, maximising profit
  • Meet short-term financial obligations
  • Pay tax
  • Meet payments on loans and overdrafts

Working capital equation = Current assets – current liabilities

• Working capital management is determining the best mix of current assets and current liabilities needed to achieve the business’s objectives.

Current (working capital) ratio = Current assets ÷ current liabilities

• Ratio used to determine assets in relation to liabilities.
• Businesses should have roughly twice the amount of current assets to current liabilities in order to have a healthy liquidity ratio.