What is working capital?
Working capital measures the cushion a business has to meet short-term obligations and fund daily operations.
Working capital = Current assets − Current liabilities
Many analysts also use net operating working capital: (Receivables + Inventory) − Payables, which excludes cash and debt.
Example
Current assets of $180,000 (cash $40,000, receivables $70,000, inventory $70,000) and current liabilities of $120,000 give working capital of $60,000.
Positive vs negative working capital
- Positive: the business can cover short-term debts.
- Negative: a possible [liquidity](/glossary/liquidity) risk, though some business models (such as supermarkets that collect cash before paying suppliers) operate this way comfortably.
The cash conversion cycle
CCC = Days inventory outstanding + Days sales outstanding − Days payables outstanding
A shorter cycle means cash is tied up for less time.
How to improve working capital
- Invoice promptly and chase overdue [accounts receivable](/glossary/accounts-receivable).
- Reduce slow-moving inventory (see [inventory turnover](/glossary/inventory-turnover)).
- Negotiate longer terms with suppliers.
- Use a [line of credit](/glossary/line-of-credit) for seasonal gaps.
Why growth needs working capital
As sales grow, receivables and inventory grow too, absorbing cash before profits arrive. Many fast-growing businesses run short of cash for this reason.