Working capital
Current assets minus current liabilities. A measure of short-term liquidity — what a business has on hand to cover near-term obligations.
Working capital is current assets − current liabilities. Current assets include cash, accounts receivable (money customers owe you), and inventory. Current liabilities include accounts payable (money you owe suppliers), short-term debt, and accrued expenses.
Positive working capital means the business can cover its short-term obligations from its short-term resources. Negative working capital — common in retail and restaurants where suppliers extend credit and customers pay cash — isn't necessarily bad, but it's distinctive.
The working capital cycle matters enormously for cash-strapped businesses:
- If you have to pay suppliers in 30 days but customers pay you in 60 days, you need 30 days of working capital to fund the gap
- The faster you can collect (shorter receivables) and the slower you can pay (longer payables, within reason), the less working capital you need
Growth often eats working capital — selling more means buying more inventory or carrying more receivables before getting paid. Founders sometimes hit "growing-broke" territory: profitable on paper, out of cash.
Improving working capital is one of the highest-leverage ways to free up cash without raising or cutting expenses. Faster invoicing, automated collections, supplier renegotiation all show up as working-capital improvements.
See also
- Operating cash flow — The cash a business generates from its core operations, before financing or investing activities. The truest measure of business health.
- Free cash flow — Operating cash flow minus capital expenditures. The cash left over after running and maintaining the business — available for growth, debt paydown, or owners.
- Burn rate — How much cash a startup spends each month above what it earns. Net burn = expenses − revenue.
Ask Cashowa about working capital
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