Finance
Working Capital
Current assets minus current liabilities, the cash and near-cash needed to fund day-to-day operations.
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?
Positive working capital means a cushion; negative means you're funding operations from long-term sources (or you're insolvent).
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.
Common pitfalls
- Treating accessible but undrawn lines of credit as working capital; banks can cut them in a downturn
- Including illiquid 'current assets' (slow-moving inventory, disputed receivables) at full value
- Confusing working capital health with profitability; a business can have great margins and still die from working-capital starvation
Related service
See fractional CFO servicesRelated terms
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