# Working Capital Management: Definition, Calculation, Types & Example

##### Yarab A|Updated on: August 24, 2022

To begin with, working capital is simply the difference between current assets and current liabilities. The difference indicates the availability of money to run day-to-day business operations and meet short-term obligations. Now, let’s understand working capital management.

## Definition of working capital management

Working capital management can be defined as a business strategy to manage working capital. In other words, working capital management is nothing but all that takes to maintain sufficient cash flow to meet various business obligations.

Working capital management involves planning, monitoring, and efficient usage of working components to have a positive impact on the cash flow.

## Working capital calculation

Before we understand how working capital is calculated, let’s understand the components of working capital. The key components of working capital are current assets and current liabilities. Current assets are those that can be converted into cash in the short-term, usually, 1 year and current liabilities include all short-term debts.

Once you have determined the total value of current assets and current liabilities, you can apply the below formula to calculate working capital

Working Capital = Current Asset -Current Liabilities

Read Working Capital – Definition, Formula and How to Calculate to know more about working capital and calculation.

## Example of working capital

Let’s understand the working capital calculation with an example

Below is the balance sheet of Max Electronics for the financial year ‘19-‘20. Using the details given in the balance sheet, let’s calculate the working capital of Max Electronics.

 Max Electronics Balance Sheet for 1-Apr-19 to 31-3-20 Liabilities Amount Assets Amount Capital Account 20,00,000 Fixed Assets 7,50,000 Capital 20,00,000 Office Computers 1,50,000 Loans (Liability) 1,50,000 Office Furnitures 6,00,000 Long-Term Borrowings 1,50,000 Current Assets 72,26,215 Current Liabilities 37,00,346 Closing Stock 12,64,500 Duties & Taxes 6,86,778 Sundry Debtors 44,74,090 Sundry Creditors 30,13,568 Cash-in-Hand 72,810 Profit & Loss A/c 21,25,869 Bank Accounts 14,14,815 Opening Balance 14,14,083 Current Period 7,11,786 Total 79,76,215 Total 79,76,215

Now, lets us apply the formula to determine the working capital of Max Electronics

Working Capital = Current Asset -Current Liabilities

72,26,215 – 3700346 = 35,25,869

The working capital of Max Electronics is 35,25,869.

## How businesses track and manage working capital?

A positive working capital ratio indicates the business is well-positioned to pay its short-term debts. While a negative working capital reflects the financial difficulties to settle short-term debts. Here is why working capital management plays a key role to ensure sufficient availability of resources to meet its obligations.

Given the importance and frequent need to track, monitor and measure working capital, most of the businesses have automated the process using business management software. Through auto-generated reports, business management software helps you to be on top of the working capital needs of the business.

Using TallyPrime’s ratio analysis report, you can instantly know the financial ratios including the working capital ratios. Ratio analysis report helps you compare different sets of financial data, giving you an understanding of the financial position of a business.

Ratio analysis report generated in TallyPrime

Balance sheet representing working capital in TallyPrime

Language