finance
Working Capital
Current assets minus current liabilities. Money available to fund day-to-day operations.
Definition
Working capital is current assets (cash, receivables, inventory) minus current liabilities (payables, short-term debt). It is the financial cushion that funds day-to-day operations. Positive working capital means you can pay short-term obligations from short-term assets. Negative working capital is dangerous - it means you depend on continuous new cash inflow just to stay current. The working capital ratio (current assets / current liabilities) above 1.5 is healthy; under 1.0 is a warning sign.
In your business
- →Track working capital monthly - watch the trend, not just the level
- →If working capital is negative, accelerate receivables before extending payables
- →Growth often consumes working capital - more sales = more receivables tied up