What Is Working Capital?
Working capital is the money available to run your business day-to-day. Too little and you can't operate; too much and it's inefficient.
Key Takeaways
- Working capital = Current Assets minus Current Liabilities.
- Positive working capital means you can meet short-term obligations.
- Many profitable businesses fail due to insufficient working capital.
The definition
Working capital is current assets minus current liabilities. Current assets are things you'll convert to cash within 12 months: cash, stock, and amounts owed to you by customers (receivables). Current liabilities are amounts you owe within 12 months: supplier invoices, short-term loans, tax due. The difference is your working capital.
Positive vs negative working capital
Positive working capital means you have more liquid assets than short-term obligations — you can operate comfortably. Negative working capital means your short-term debts exceed your liquid assets — a precarious position that requires careful management or external financing.
The working capital cycle
Cash goes out when you pay for stock. Stock becomes receivables when you make a sale. Receivables become cash when customers pay. The faster this cycle, the less working capital you need. Slow-moving stock, long customer payment terms, and fast supplier payment terms all trap working capital in the cycle.
How to free up working capital
Reduce stock holding where possible (just-in-time ordering, faster-turning product mix). Invoice immediately on delivery. Chase receivables actively. Negotiate longer payment terms with suppliers. Use invoice finance or stock finance to bridge gaps. Each of these actions compresses the working capital cycle.