Working capital is an important measure of a company’s financial health. It’s defined as the difference between Current Assets and Current Liabilities (Working Capital = Current Assets – Current Liabilities). When a company has positive working capital, it is able to pay off its short-term liabilities from assets that can be quickly converted to cash.
Inventory is a part of current assets and therefore has a direct impact on working capital levels. Because of its impact on working capital and for many other reasons, ensuring that inventory is managed properly is critical for business success.
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