Working capital (WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
Working capital can be found through the following formula:
WC=CA-CL (Working Capital = current assets - current liabilities)
Current assets (CA) is an accounting term that refers to assets that can easily be turned into cash. For example, cash is a current asset, but so are most accounts receivable.
Current liabilities (CL) is an accounting term similar to CA: CL is the amount of liabilities that are expected to be settled in cash within a year (or the operating cycle of the company).
The difference between the two (WC) is a measurement of liquidity. It signals whether or not the company has enough assets to turn into cash to pay off upcoming liabilities. It is not a perfect signal, however.
Since most expenses and debt must be paid in cash , having positive WC shows that the company has the ability to pay off expenses and debt that will arise or come due in the short-term.
Buying Food
Most purchases, including food, must be made with a specific asset–cash. Not all current assets can be used to pay off expenses of debts.
WC, though, does not guarantee that a company can pay off all short-term expenses or liabilities. Simply having positive WC does not mean necessarily that a company will be able to pay off all expenses. Suppose that a company has current assets of $100: $20 of cash and $80 of accounts receivable. They also have $50 of current liabilities. That means that they have WC of +$50. One of their accounts payable comes due tomorrow, so the company owes $40. They have $20 of cash on hand, but can't get the other $20 by tomorrow because they can't collect $20 of accounts receivable by tomorrow. The company cannot pay a short-term expense, even though a positive WC says that the company should be able to pay off most expenses and loans in the short-term.
WC is not a guarantee that the company will have enough cash for each expense, merely that they have operating liquidity.