Working Capital: What Is It and How Do You Use It?

Your business may have valuable equipment, plenty of inventory, and strong sales, but does it have the financial resources needed to handle its day-to-day obligations?

That’s where working capital comes in.

Working capital is one way to evaluate your business’s short-term financial position. It can help you understand whether you have sufficient resources to continue operating smoothly and make more informed decisions about inventory, staffing, expansion, financing, and other business needs.

Working capital generally refers to the difference between your business’s current assets and current liabilities. It’s not the same as cash flow, which measures the movement of money into and out of your business over a period of time.

Working capital = Current assets − Current liabilities

Current assets are resources that can generally be converted to cash or used within one year, such as:

• Cash
• Accounts receivable
• Inventory
• Certain short-term investments

Current liabilities are financial obligations that are generally due within one year, such as:

• Accounts payable
• Short-term debt
• Accrued expenses
• Certain taxes
• Other upcoming financial obligations

For example, if your business has $150,000 in current assets and $100,000 in current liabilities, it has approximately $50,000 in working capital.

Positive working capital generally means your current assets exceed your current liabilities. This can provide greater flexibility for covering operating expenses and other short-term needs.

Negative working capital means your current liabilities exceed your current assets. This doesn’t automatically mean a business is in financial trouble, but persistent shortages may make it more difficult to pay bills and manage everyday operations.

Monitoring working capital can help you recognize potential financial pressure before it becomes more difficult to manage.

Adequate working capital can help support many of your business’s everyday needs.

• Operating expenses. Working capital can help your business manage expenses such as payroll, utilities, rent, insurance, and other costs required to keep operations running.
• Inventory and supplies. Businesses may need to purchase products, raw materials, or supplies before receiving revenue from the resulting sales. Having sufficient working capital can help bridge that gap.
• Seasonal needs. Some businesses experience predictable changes in revenue throughout the year. Working capital can help cover expenses during slower periods or help a business prepare inventory and staffing for its busiest season.
• Unexpected expenses. Equipment repairs, rising material costs, delayed customer payments, and other surprises can affect your finances. Additional working capital can provide greater flexibility when unexpected costs arise.
• Growth opportunities. Working capital may also help a business prepare for growth, such as taking on a large customer order, increasing inventory, expanding marketing efforts, or hiring additional employees.

If your business needs more financial flexibility, several strategies may help.

Start by reviewing how quickly customers pay outstanding invoices. Faster collections can make more cash available for current obligations.

Inventory management can also make a difference. Excess inventory is essentially money that could otherwise support the business, while too little inventory could make it difficult to meet customer demand.

Consider reviewing payment schedules and business expenses as well. Understanding when expenses are due can help you coordinate outgoing payments with incoming revenue.

Maintaining cash reserves can provide another layer of financial flexibility, particularly for seasonal businesses or companies with inconsistent revenue.

A business can sometimes have healthy long-term prospects while still needing additional short-term resources.

Business financing may help bridge that gap. Depending on your needs, options could include a business line of credit or another form of commercial financing.

A line of credit, for example, may be useful when working capital needs fluctuate because a business can access available funds when needed rather than receiving a single lump-sum loan.

Before borrowing, consider the interest rate, fees, repayment terms, and your business’s ability to repay the debt. It’s also important to consider whether financing fits into your broader business goals.

What is working capital?

Working capital is generally calculated by subtracting a business’s current liabilities from its current assets. It provides a snapshot of the resources available to meet short-term financial obligations.

Is working capital the same as cash?

No. Cash can be part of working capital, but working capital may also include other current assets, such as accounts receivable and inventory.

How much working capital should a business have?

There is no single amount that applies to every business. Working capital needs can vary based on your industry, operating expenses, payment cycles, seasonality, growth plans, and other factors.

Can a business borrow money for working capital?

Yes. Businesses may use financing, including certain business loans or lines of credit, to help address working capital needs. Borrowing should be evaluated based on the cost of financing and the business’s ability to repay it.

Working capital is about more than a formula. It can influence your ability to pay employees and vendors, maintain inventory, respond to unexpected expenses, and pursue opportunities.

Regularly reviewing your current assets, short-term obligations, cash flow, and upcoming needs can give you a clearer picture of your business’s financial position.