Working capital (see video definition) is the money that a company requires for day-to-day needs, and in general:
Working Capital = Current Assets - Current Liabilities
The positive value of working capital (see another definition) represents the financial health of the business. Working capital is normally comprised of money required for raw material inventory, in-process materials inventory, product inventory, accounts receivables, and ready cash. For evaluation purposes, working capital generally is considered to be put into a project at the start of a business or production operation and to be fully recovered at the end of the project life when inventories are liquidated. Working capital is not allowable as tax deduction in the year it is incurred so it often has a very negative effect on project economics. Working capital cost may not be expensed, depreciated, amortized, or depleted until inventory assets are actually used or put into service. Working Capital represents the capital cost required to generate raw material inventories, in-process inventories, product inventories, and parts and supplies inventories. As inventories are used and product sold, working capital cost items become allowable tax deductions as operating costs through the cost of goods sold calculation. However, as inventory items are used, they typically are replaced so inventories are maintained at a similar level over the project life. If significant increases or decreases in working capital are projected to occur from year to year, positive or negative working capital costs can be accounted for from year to year in project analysis.