Financial Terms

What Is Working Capital?

Understanding working capital helps you manage cash flow and make smarter financing decisions.

Working capital is the money your business has available to cover day-to-day operations—the difference between your current assets (cash, inventory, accounts receivable) and current liabilities (accounts payable, short-term debt). Positive working capital means you can pay bills and invest in growth; negative working capital signals cash flow problems that may require financing.

How Working Capital Works

Working capital measures your business's short-term financial health. It's the cash cushion that keeps operations running smoothly between when you pay expenses and when you receive payments from customers.

Most business owners don't lose sleep because of "growth." They lose sleep because of timing—payroll is due Friday, but a big invoice doesn't get paid until next week. Working capital controls everything: hiring, inventory, taking new contracts, and handling unexpected expenses.

When working capital is tight, you might turn down opportunities, delay payments to vendors (damaging relationships), or miss payroll. When it's healthy, you can move quickly, negotiate better terms, and invest in growth without stress.

How to Calculate Working Capital

The working capital formula is simple:

Working Capital = Current Assets - Current Liabilities

Current Assets Include:

Cash and cash equivalents (checking, savings)
Accounts receivable (money customers owe you)
Inventory (products ready to sell)
Prepaid expenses (insurance, rent paid ahead)

Current Liabilities Include:

Accounts payable (bills you owe vendors)
Short-term debt (credit cards, lines of credit balances)
Accrued expenses (payroll, taxes owed)
Current portion of long-term debt (due within 12 months)

Need help calculating your working capital? Use our working capital calculator.

Working Capital Examples

Example 1: Positive Working Capital

A landscaping company has:

• Cash: $25,000
• Accounts receivable: $15,000
• Inventory (equipment, supplies): $10,000
• Total Current Assets: $50,000

• Accounts payable: $8,000
• Credit card balance: $5,000
• Total Current Liabilities: $13,000

Working Capital = $50,000 - $13,000 = $37,000

This business has healthy working capital and can cover expenses comfortably.

Example 2: Negative Working Capital

A restaurant has:

• Cash: $5,000
• Accounts receivable: $2,000
• Inventory (food, supplies): $8,000
• Total Current Assets: $15,000

• Accounts payable: $12,000
• Payroll due: $8,000
• Short-term loan: $5,000
• Total Current Liabilities: $25,000

Working Capital = $15,000 - $25,000 = -$10,000

This business has negative working capital and may struggle to pay bills. They need financing to stabilize cash flow.

Why Working Capital Matters

Working capital isn't just a number—it's a measure of your business's ability to operate smoothly and grow. Here's why it matters:

Cash Flow Management: Positive working capital means you can pay bills on time, avoid late fees, and maintain good vendor relationships.
Growth Opportunities: When you have working capital, you can take on new contracts, invest in inventory, or hire staff without waiting for customer payments.
Lender Confidence: Lenders check working capital to assess your ability to repay loans. Healthy working capital improves your chances of approval and better rates.
Emergency Buffer: Unexpected expenses happen. Working capital provides a safety net for equipment repairs, slow seasons, or economic downturns.

How to Improve Your Working Capital

1. Speed Up Receivables

Invoice faster, offer early payment discounts, and follow up on overdue accounts. Consider invoice financing to get paid immediately.

2. Manage Inventory Efficiently

Don't tie up cash in excess inventory. Use just-in-time ordering and sell slow-moving stock at a discount.

3. Negotiate Payment Terms

Extend payment terms with vendors when possible. If you pay net 30, see if you can get net 45 or net 60.

4. Use Working Capital Financing

A working capital loan or business line of credit can provide the cash you need to cover gaps and take advantage of opportunities.

Frequently Asked Questions

What's a good working capital ratio?

A working capital ratio (current assets ÷ current liabilities) of 1.5 to 2.0 is considered healthy. Below 1.0 means you may struggle to pay bills. Above 2.5 might indicate you're holding too much cash that could be invested in growth.

Can I have too much working capital?

Yes. Excess working capital means cash sitting idle instead of being invested in growth, equipment, or marketing. However, having too much is better than having too little—it's a good problem to have.

How often should I calculate working capital?

Review it monthly as part of your financial health check. Track it over time to spot trends. If it's declining, address cash flow issues before they become critical.

What's the difference between working capital and cash flow?

Working capital is a snapshot of your current financial position (assets minus liabilities). Cash flow is the movement of money in and out over time. Both matter, but working capital shows if you can cover short-term obligations right now.

Need Help Improving Your Working Capital?

Our team can help you find the right financing solution to stabilize cash flow and support growth.

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