Finance & Accounting
Definition
Working capital is the difference between a company's current assets (cash, receivables, inventory) and its current liabilities (payables, short-term debt). It measures whether a business has enough short-term assets to cover its short-term obligations and fund day-to-day operations.
Working Capital = Current Assets − Current Liabilities. Positive working capital means a company can meet its near-term obligations and has liquidity for operations. Negative working capital means current liabilities exceed current assets — a warning sign unless the business model structurally generates negative working capital (as some retailers do by collecting cash before paying suppliers). Key components include accounts receivable (money owed to you), inventory, accounts payable (money you owe suppliers), and short-term debt. The Working Capital Ratio (Current Ratio = Current Assets ÷ Current Liabilities) is a standard liquidity metric — a ratio above 1.0 means positive working capital. Working capital management involves optimizing the cash conversion cycle: collecting receivables faster, managing inventory efficiently, and negotiating favorable payment terms with suppliers.
Many profitable businesses fail because they run out of working capital — they are technically making money but can't pay their bills. A financial advisor or fractional CFO can help you model your working capital cycle, identify cash flow bottlenecks, and structure your operations and financing to maintain adequate liquidity.