Working Capital

Working capital is calculated as current assets minus current liabilities. If a business has current assets of 500,000 and current liabilities of 320,000, its working capital is 180,000.

Positive working capital means the business has more short-term resources than short-term obligations, which suggests it can pay its bills as they fall due. Negative working capital can be a warning sign, although some businesses, such as supermarkets, operate comfortably with it because customers pay immediately while suppliers are paid later.

Working capital ties up cash. Inventory on shelves and money owed by customers are resources that cannot be spent until they are converted to cash. When a business grows, it usually needs more inventory and has more receivables, so it needs more working capital, which can strain cash even when profits are rising.

Managing working capital well means collecting from customers promptly, holding only the inventory needed and paying suppliers on agreed terms, so that cash keeps flowing smoothly.