Working Capital

What is Working Capital?

Working capital is the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt). It measures your ability to cover short-term obligations and fund daily operations.

Positive working capital means you have enough liquid assets to pay near-term bills. Negative working capital means you might struggle to meet obligations without additional financing.

Why Working Capital Matters

Working capital is the fuel for daily operations. You need it to pay suppliers, cover payroll, and maintain inventory while waiting for customer payments. Insufficient working capital causes cash crunches even in profitable businesses.

Managing working capital efficiently improves cash flow. Collect receivables faster, negotiate longer payment terms with suppliers, and optimize inventory levels.

Working Capital Ratio

The ratio of current assets to current liabilities should be 1.5-2.0 for most businesses. Below 1.0 is dangerous. Above 2.0 might mean you're not deploying capital efficiently.

Balance sheet items:

• Current assets: $500,000 (cash, receivables, inventory)
• Current liabilities: $300,000 (payables, short-term debt)

Working Capital = $500K - $300K = $200,000

You have $200K cushion to cover short-term obligations. That's a working capital ratio of 1.67, which is healthy.