Working Capital

What is Working Capital?

Working capital is the cash and liquid assets you have available to cover short-term obligations (bills due within the next 12 months). It's calculated as current assets minus current liabilities.

Positive working capital means you can cover your near-term bills. Negative working capital means you owe more in the short term than you have available — a potentially dangerous position.

For startups, working capital is heavily influenced by the timing of payments. If you collect from customers before paying your bills, you have strong working capital. If you pay upfront (annual tool subscriptions, prepaid rent) and collect later, working capital can be tight even if the business is healthy.

Why it matters

Working capital problems can kill otherwise healthy businesses. If you can't make payroll or pay a critical vendor because cash is tied up elsewhere, it doesn't matter that you're "profitable" on paper.

Managing working capital is especially important for startups with enterprise customers who pay on net-30 or net-60 terms. You might close a big deal but not see the cash for months — meanwhile, your expenses are due now.

Formula

Working Capital = Current Assets - Current Liabilities

Example

Common mistakes

• 1Ignoring the timing of receivables (money owed to you isn't the same as money in the bank)
• 2Not tracking working capital trends — a declining trend signals potential liquidity problems
• 3Confusing working capital with cash (accounts receivable are part of working capital but aren't cash yet)