Working Capital

What Is Working Capital?

Working capital measures your short-term financial health. The formula is: Working Capital = Current Assets - Current Liabilities. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, short-term loans, and other obligations due within a year.

For example, a retail business with $80,000 in cash, $40,000 in accounts receivable, and $60,000 in inventory has $180,000 in current assets. If it has $100,000 in current liabilities, its working capital is $80,000. This means the business has an $80,000 cushion to operate with.

Why It Matters for Your Business

Working capital is the fuel that keeps your business running from day to day. Without adequate working capital, even profitable businesses can fail.

• Operational stability: Sufficient working capital ensures you can pay suppliers, employees, and bills without delay, even during slow sales periods.
• Growth capacity: Businesses need working capital to fund growth. Buying more inventory, extending credit to larger customers, or hiring ahead of demand all require working capital.
• Borrowing indicator: Lenders use working capital ratios to assess your ability to repay loans. Healthy working capital makes it easier to secure financing on favorable terms.

Improving working capital involves speeding up collections (getting paid faster), managing inventory levels (not tying up cash in excess stock), and negotiating longer payment terms with suppliers (keeping cash longer).