Working Capital
Aussi : Net Working Capital, NWC
Working capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.
What It Is
Working capital is a measure of a company's short-term financial health. It is calculated with a simple formula:
Working Capital = Current Assets, Current Liabilities
Current assets are resources expected to be converted to cash within one year (cash, accounts receivable, inventory, prepaid expenses). Current liabilities are obligations due within one year (accounts payable, short-term debt, accrued expenses, the current portion of long-term debt).
A positive working capital means a company can cover its near-term obligations with its near-term assets. A negative working capital signals possible liquidity stress, though some efficient business models (for example, fast-turnover retail) operate comfortably with negative working capital.
Why it matters
- Liquidity: It shows whether a business can pay bills, suppliers, and payroll without raising new financing.
- Operational runway: It funds the gap between paying for inputs and collecting from customers.
- Growth signal: Rapid growth often consumes working capital because inventory and receivables rise before cash arrives.
- Lender and investor view: Banks and investors use it (and related ratios) to assess solvency risk.
How it is used in practice
Finance teams monitor working capital alongside the current ratio (current assets / current liabilities) and the cash conversion cycle (days inventory + days receivables, days payables). CFOs actively manage it by:
- Negotiating longer payment terms with suppliers (raising payables).
- Collecting receivables faster (tightening credit terms, invoicing earlier).
- Reducing excess inventory.
The goal is usually to free up cash without disrupting operations.
Concrete Example
A manufacturer has:
- Current assets: cash 50k, receivables 120k, inventory 130k = 300k
- Current liabilities: payables 90k, short-term debt 60k = 150k
Working capital = 300k, 150k = 150k.
The current ratio is 300k / 150k = 2.0, a healthy buffer. If the firm doubled sales next quarter, receivables and inventory would likely grow, consuming cash and requiring either faster collections or additional financing to avoid a squeeze.