The cash and short-term assets tied up in running the business day-to-day. Working capital is the buffer between revenue earned and cash collected, between expenses incurred and payments due.
Definition
Working Capital - current assets minus current liabilities. The capital tied up in the day-to-day operations of the business - receivables, inventory, and cash, less payables and short-term debt.
Formula
Working Capital = Current Assets − Current Liabilities Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding
Common uses
- Liquidity assessment - can the business meet short-term obligations?
- Growth planning - how much working capital will growth require?
- Cash management - identifying where cash is tied up
Watch out
Working capital needs grow with the business. A business doubling revenue typically needs to roughly double its working capital - which has to come from operations, debt, or equity.