Glossary · Also called Net current assets
Working capital
The money a business has available for its day-to-day running.
What it means
Current assets less current liabilities; a measure of short-term financial health.
Example
Current assets of RM30,000 less current liabilities of RM18,000 gives working capital of RM12,000.
Why it matters
Too little working capital means a business may struggle to pay its bills even if it is profitable.
In practice
Working capital is not a line you post to a ledger. You calculate it from the statement of financial position as current assets minus current liabilities. Examiners often expect you to show the workings beneath the current section.
Suppose a shop holds inventory of RM8,000, trade receivables of RM3,000 and cash of RM1,000. It owes trade payables of RM4,000 and a short-term loan of RM2,000. Current assets total RM12,000 and current liabilities RM6,000, so working capital is RM6,000. This surplus lets the owner buy fresh stock and pay wages before customers settle their accounts.
Do not confuse working capital with capital. Capital is the owner's total stake in the business and appears in the financing section. Working capital is a short-term measure of cash and near-cash resources. A business can have large capital tied up in premises and still run short of working capital.
If working capital and liquidity ratios feel confusing, one of our teachers can calculate them with you from a real past-paper statement. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 6.2 Interpretation of accounting ratios (page 18); sub-topic 6.3 Inter-business comparison (page 19).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
Need working capital explained properly?
Tell us your child’s year and board on WhatsApp and we will suggest a first lesson. One-to-one and online, from RM75/hr.
One-hour paid trial · Same-day reply