What is Working Capital?

Working capital is the difference between current assets, such as cash, receivables and inventory, and current liabilities, such as payables, credit cards and short-term debt. It measures the cushion a business has to pay its near-term obligations.

Example

A business has $40,000 cash, $60,000 receivables and $50,000 inventory, totaling $150,000 of current assets. Its current liabilities are $90,000. Working capital is $60,000.

Why growing businesses run short

Growth consumes working capital. More sales usually mean more inventory and larger receivables before customers pay, while suppliers and payroll must be paid now. Profitable, fast-growing businesses can run out of cash for exactly this reason.

The working capital cycle

The cycle measures how long cash is tied up: days to sell inventory, plus days to collect receivables, minus days you take to pay suppliers. Shortening it, by collecting faster, holding less stock or negotiating supplier terms, frees cash without new financing.

Managing it

• Invoice promptly and follow up on overdue accounts receivable
• Keep inventory levels tied to sales; see inventory accounting basics
• Use supplier terms rather than paying early unless there is a discount
• Arrange a line of credit before you need it

Related measures

The current ratio, current assets divided by current liabilities, expresses the same relationship as a ratio; see liquidity and our guide to cash flow basics. The SBA's guidance on managing your finances also stresses monitoring cash needs.

Related terms

• Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.
• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
• Liquidity: Liquidity is a business's ability to meet short-term obligations with cash or assets that can quickly become cash.

Browse more definitions in the small business glossary.