Write an article based on this "Calculate current assets. Calculate current liabilities. Calculate working capital."
Current assets are assets that a company will convert to cash within one year. These assets include cash and other short-term accounts. For example, accounts receivable, prepaid expenses and inventory would all be current assets. You can usually find this information on a company's balance sheet, which should include a subtotal of current assets. If the balance sheet does not include a subtotal of current assets, read through the balance sheet line by line. Add up all accounts which meet the definition of a current asset to come up with a subtotal. For example, you would include the figures listed for "accounts receivable," "inventory," and "cash and equivalents." Current liabilities are those that are due within one year. They include accounts payable, accrued liabilities and short-term notes payable. The balance sheet should include a subtotal of current liabilities. If it does not, use the balance sheet information to find this total by adding up the listed liabilities. For example, this would include "payables and provisions," "taxation payable," and "short term loans." This calculation is just basic subtraction. Subtract the current liability total from the current asset total. For example, imagine a company had current assets of $50,000 and current liabilities of $24,000. This company would have working capital of $26,000. The company would be able to pay all its current liabilities out of current assets and would also have cash left over to serve other purposes. The company could use the cash for financing operations or long-term debt payment. It could also distribute the money to shareholders. If current liabilities are greater than current assets, the result is a working capital deficit. A deficit could signal that the company is at risk of becoming insolvent (meaning unable to pay their debts when they become due). There are many reasons why a company may become insolvent. Such a company may need other sources of long-term financing. This may signal the company is in trouble, and may not be a good investment. For example, consider a company with current assets of $100,000 and current liabilities of $120,000. This means they will only be able to pay $100,000 of that debt, and will still owe $20,000 (their working capital deficit). In other words, the company will be unable to meet its current obligations and must sell $20,000 worth of long-term assets or find other sources of financing. If the company is in danger of being insolvent, they may opt to restructure the debt so that they can continue operating while paying off their debt.