Working capital is the difference between current assets and current liabilities. It measures a company's ability to pay its short-term obligations and fund day-to-day operations. Positive working capital means the business has more short-term assets than obligations; negative working capital signals potential cash flow problems.

Two key ratios provide deeper insight: the Current Ratio = Current Assets / Current Liabilities measures overall short-term solvency, while the Quick Ratio = (Cash + Receivables) / Current Liabilities strips out inventory to show liquidity from the most liquid assets. A current ratio above 1.5 is generally considered healthy, while a quick ratio above 1.0 is a strong indicator of liquidity.

For example, a business with $190,000 in current assets and $90,000 in current liabilities has $100,000 in working capital and a current ratio of 2.11. If inventory accounts for $60,000 of those assets, the quick ratio drops to 1.44. Both ratios are healthy, but the gap between them highlights how much liquidity depends on selling inventory. Monitoring working capital regularly helps prevent cash shortfalls and supports better financial planning.