Working Capital — The Dollar Dictionary

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Finance

Working Capital

Current assets minus current liabilities — the measure of a company's ability to fund its day-to-day operations.

Working capital = Current Assets − Current Liabilities. Current assets include cash, accounts receivable, and inventory — things expected to convert to cash within a year. Current liabilities include accounts payable, short-term debt, and accrued expenses — obligations due within a year.

Positive working capital means the company can cover its short-term obligations comfortably. Negative working capital sounds alarming but can actually be a sign of efficiency — Amazon and Walmart collect customer payments before they pay suppliers, meaning they operate on negative working capital. But for most businesses, negative working capital is a warning sign requiring immediate management attention.

Working capital is what's in your fridge right now. You might own a house (long-term asset), but if you have no food in the fridge and no cash to buy any, you can't feed yourself this week. Similarly, a company can be worth millions in long-term assets but collapse because it doesn't have enough liquid resources to pay this month's salaries, rent, and supplier invoices.

Real world: Retail businesses are particularly working capital-intensive. A fashion retailer buys inventory months before selling it — cash goes out in March, sales receipts come in September. That gap requires significant working capital financing. Companies like H&M and Zara manage this precisely, using supplier payment terms, inventory forecasting, and revolving credit facilities to ensure the cash cycle doesn't break down.

💡 Working capital is the difference between a business that thrives and one that's profitable on paper but can't make payroll — the daily reality check of financial health.

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