Glossary
Working Capital
Working capital is the difference between a company’s current assets and current liabilities, the net liquid resources available to fund day-to-day operations. It is a fundamental measure of a business’s short-term financial health, operational efficiency, and ability to meet its obligations as they fall due.
What It Is
Every business has a cycle: buy inputs, produce or deliver, invoice, and collect. Working capital is the fuel that keeps this cycle running. When working capital is positive and sufficient, the business can pay its bills, fund its operations, and pursue growth opportunities without external financing stress. When working capital is tight or negative, the business faces constant pressure to find cash, distracting management, limiting growth, and in extreme cases, triggering insolvency even in profitable companies.
Working capital is not a static number. It fluctuates daily with every invoice raised, every supplier payment made, and every customer receipt collected.
The Formula
Working Capital = Current Assets − Current Liabilities
Current Assets: assets expected to convert to cash within 12 months:
Cash and cash equivalents
Trade receivables (accounts receivable)
Inventory
Prepaid expenses and other short-term assets
Current Liabilities: obligations due within 12 months:
Trade payables (accounts payable)
Short-term debt
Accrued expenses
Tax liabilities due within 12 months
Positive vs. Negative Working Capital
Strongly positive: large buffer of liquid assets over short-term debts; conservative and resilient. Common in manufacturing, technology, pharmaceuticals.
Modestly positive: adequate liquidity with efficient asset deployment. Common in most well-managed businesses.
Near zero: tight, manageable with strong cash flow but vulnerable to shocks. Common in fast-growing SMEs, seasonal businesses.
Negative: current liabilities exceed current assets. Common in grocery retail, subscription businesses.
Negative working capital is not always a problem. Large retailers like supermarkets deliberately operate with negative working capital; they collect cash from customers immediately but pay suppliers on extended terms, effectively funding operations with supplier credit.