Working Capital

Working capital answers: can the business pay its obligations over the next 12 months from assets it can convert to cash in the next 12 months? The formula is simple (current assets − current liabilities) but the interpretation is the whole game — the composition of those assets and liabilities determines whether the number is real.

Positive working capital means a cushion; negative means you're funding operations from long-term sources (or you're insolvent). Some businesses (grocery chains, subscription SaaS) run deliberately negative working capital because they collect from customers before paying vendors — good news, not bad. A negative number always needs a business-model explanation.

Growth eats working capital: a fast-growing SMB needs more inventory, more receivables, and more payroll faster than profit can fund. It is the most common cause of profitable-but-cash-strapped businesses — the classic 'growing yourself out of cash' failure mode that catches every owner who watches only the P&L.

Two ratios cut it more precisely than the raw number. The current ratio (current assets / current liabilities) benchmarks liquidity across sizes: 1.5-2.0 is comfortable for most industries, under 1.0 is a real risk. The cash conversion cycle (DIO + DSO − DPO, in days) shows how many days of operating cost you have to finance between paying suppliers and collecting from customers — the lower the better, and negative is the holy grail. Our working capital calculator computes both from your balance sheet in a few keystrokes.

The three levers that improve working capital in that order of speed: collect receivables faster (billing hygiene, deposits, autopay), stretch payables to terms without burning vendors, and cut inventory (SKU rationalisation, JIT for slow movers). A 10-day DSO reduction on $2M of revenue is roughly $55,000 of freed cash — real money that costs no external financing.