In plain English
Positive working capital means you could cover near-term obligations with near-term assets, in theory.
Collection speed matters as much as the number.
Why it matters
Working capital tells you whether near-term assets can cover near-term bills. A business with growing sales can still run short if customers pay slowly and suppliers want payment fast. Lenders often look at this figure when deciding whether to extend a line of credit.
It also helps you judge timing decisions, such as whether to buy a large stock order now or wait for receivables to come in.
Worked example
Current assets $45,000 minus current liabilities $30,000 is $15,000.
How to handle it
- Run a balance sheet as of a recent month end.
- Add up current assets, such as cash, receivables, inventory and prepaid expenses.
- Add up current liabilities, such as payables, credit cards, payroll and sales tax owed, and the next year of loan payments.
- Subtract liabilities from assets and track the result month by month in a spreadsheet.
Common mistakes
- Counting old, uncollectible receivables as current assets, which makes the cushion look bigger than it is.
- Leaving the next year of loan principal in long-term debt, which understates current liabilities.
- Looking only at the total and ignoring how much is tied up in slow-moving inventory.
Not the same as: Cash flow
Working capital is a snapshot of short-term assets minus short-term liabilities at one date. Cash flow measures money moving in and out over a period. See Cash flow.
Go deeper
- Financial Ratios Small Business Owners Should Know: Learn the handful of financial ratios that matter for small businesses: margins, current ratio, debt, collection days, and how to read them.
Try it
Related terms
- Write-off: Removing an amount from the books because it will not be collected or has no value.
- Accounts payable: Money your business owes to suppliers and vendors for bills it has received but not yet paid.
- Undeposited funds: A QuickBooks holding account for payments received but not yet deposited.
Common questions
What is working capital?
Current assets minus current liabilities, a rough measure of short-term cushion.
Can you give an example of working capital?
Current assets $45,000 minus current liabilities $30,000 is $15,000.
Can working capital be too high?
It can. A large balance made up of idle cash, slow receivables or excess inventory may mean money is tied up that could be used elsewhere.
How do I improve working capital quickly?
Common levers are collecting receivables faster, reducing excess inventory and arranging longer payment terms with suppliers. Each changes the timing of cash rather than profit.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.