What Is Working Capital?
Working capital is the difference between a company's current assets and current liabilities:
It represents the short-term financial cushion available to fund daily operations.
Components
Current Assets (convertible to cash within 12 months): - Cash and equivalents - Accounts receivable - Inventory - Prepaid expenses
Current Liabilities (due within 12 months): - Accounts payable - Short-term debt - Accrued salaries and expenses - Deferred revenue
Positive vs Negative Working Capital
Positive working capital means assets exceed liabilities — the business can fund its operations without external financing.
Negative working capital means liabilities exceed assets. Some businesses intentionally operate with negative working capital by collecting cash before paying suppliers (e.g., large retailers, Amazon). For most businesses, it signals a liquidity risk.
Working Capital in Financial Analysis
Changes in working capital directly affect cash flow. Increasing receivables or inventory consumes cash; increasing payables preserves it. That's why fast-growing companies often have cash flow problems despite being profitable — growth eats working capital.
Use the Working Capital Calculator to assess your current ratio.