Cash & working capital
Working capital
Working capital is the money tied up in running the business day to day: current assets such as cash, receivables and inventory, minus the current liabilities due within a year.
Working capital = Current assets − Current liabilities
Worked example
| Current assets | $500,000 |
| Current liabilities | $300,000 |
$500,000 − $300,000 = $200,000
Why it matters
Working capital is the cushion between what comes due soon and what the business can turn into cash to pay it. Growth usually eats it, because receivables and inventory rise before the cash arrives.
Common mistakes
Where it misleads
Reading positive working capital as cash: it can be mostly slow receivables or stock that will not sell.
Ignoring the current portion of long-term debt, which belongs in current liabilities.
Looking at one balance sheet instead of the trend as the business grows.
Related terms
Keep reading
- Current ratioThe current ratio compares what a business can turn into cash within a year with what it owes within a year.
- Quick ratioThe quick ratio, also called the acid-test ratio, compares a business’s most liquid assets with what it owes within a year, leaving out inventory and prepaid expenses.
- Cash conversion cycle (CCC)The cash conversion cycle is the number of days between paying for inventory or inputs and collecting cash from the customers who buy them.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.