Here's a simple way to understand this confusing finance term. Working capital -- aka Net Working Capital -- is the difference between a company's current assets (expected to be used/consumed/converted into cash <1 year) and current liabilities (debts that are expected to be paid off in <1 year). Why is working capital important? Working Capital is a quick way to assess a company's liquidity, which is its ability to meet its short-term obligations. It serves as an indicator of a company's financial health. If working capital is positive, it indicates that a company has sufficient resources to cover its short-term financial needs. If working capital is negative, it indicates that a company may face financial difficulties. There are three ways to calculate working capital: THE SIMPLE METHOD Current Assets - Current Liabilities This is the most common method and easiest to calculate. THE NARROW METHOD (Current Assets - Cash) - (Current Liabilities - Debt) This method excludes cash & debt, which can be useful for comparing companies with different capital structures. THE SPECIFIC METHOD: Accounts Receivable + Inventory - Accounts Payable: This method focuses on the cash conversion cycle of a business, which is the time it takes to convert inventory into cash.