working capital

Working Capital

The cash and short-term assets a business has available to fund day-to-day operations, calculated as current assets minus current liabilities.

When you'd see it: Finance discussions about whether a business can pay its bills this quarter. CFOs talk about it constantly — managing working capital means making sure receivables get collected before payables come due. Retail and manufacturing businesses live and die on it; software businesses can mostly ignore it because their inventory is digital.

Why it matters: Working capital is the difference between a business that can operate and one that has to scramble. A company can be profitable and still get squeezed if customers pay slowly while suppliers want payment fast. Operationally, working-capital management is what keeps a healthy P&L from turning into a cash crisis.

Common mistakes: Confusing working capital with cash on hand. A company can have a positive working capital number while being short on actual cash, because receivables and inventory count as assets even if they aren't liquid yet. The cleaner question is "how quickly can these assets become cash?"

Related P&L, CFO