Working capital

Working capital is current assets - current liabilities: cash, accounts receivable, and inventory on one side, minus accounts payable and other short-term obligations on the other. It measures whether a company has enough liquid resources to cover what it owes in the near term and to fund day-to-day operations without external financing.

Working capital differs from cash on hand because it includes assets that are not yet cash, like unpaid customer invoices or unsold inventory, and liabilities not yet paid. A company can be profitable and still run short on working capital if too much value is tied up in receivables or inventory relative to what is coming due. The pace at which working capital turns into cash is captured more precisely by the cash conversion cycle.

Working capital matters because it drives whether a business can pay employees, suppliers, and short-term debts on time, and lenders and investors watch it as a solvency signal independent of profitability shown in the income statement. A common pitfall is treating growing working capital as automatically healthy: rapid revenue growth can consume working capital faster than it generates cash, straining liquidity even as the business scales.