Working Capital
Current assets minus current liabilities; measures short-term financial health.
Definition
Working capital is the difference between current assets (cash, accounts receivable, inventory) and current liabilities (accounts payable, short-term debt). Positive working capital means you can cover short-term obligations. Negative working capital signals cash flow problems.
It measures liquidity and operational efficiency. Businesses need sufficient working capital to pay bills, cover payroll, and fund operations between billing and payment.
Why It Matters
Inadequate working capital forces businesses to delay payments, miss opportunities, or take expensive short-term loans. Even profitable businesses fail due to poor working capital management—they can't convert receivables to cash fast enough.
Managing working capital involves collecting receivables quickly, extending payables strategically, and maintaining cash reserves. Seasonal businesses especially need working capital planning.
Examples
- 1
Company has $100,000 in current assets (cash + receivables) and $60,000 in current liabilities (payables + short-term debt) = $40,000 working capital.
- 2
Negative working capital: $50,000 assets, $75,000 liabilities = -$25,000, signaling cash flow stress.
- 3
Improving working capital: offer early payment discounts to collect receivables faster, increasing cash position.
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