Working Capital
/ˈwɜːrkɪŋ ˈkæpɪtəl/
Working capital is the money available to fund your business's day-to-day operations, calculated by subtracting your current liabilities from your current assets.
Working capital is the money available to fund your business's day-to-day operations, calculated by subtracting your current liabilities from your current assets.
Working capital represents your business's financial cushion for everyday expenses.
It's essentially the funds you have readily available to pay suppliers, cover salaries, and manage unexpected costs without scrambling for emergency financing.
Think of it as your business's breathing room.
The working capital calculation is straightforward: take your current assets (cash, inventory, accounts receivable) and subtract your current liabilities (outstanding bills, short-term debts, payroll due).
If you have €50,000 in current assets and €30,000 in current liabilities, your working capital is €20,000.
Working capital determines whether you can actually operate your business day-to-day without constantly worrying about cash.
Positive working capital means you can pay your bills on time and seize opportunities, whilst negative working capital signals potential cash flow problems that could threaten your business's survival.
While optimal working capital varies by industry, many analysts recommend and expect to see a ratio between 1.5 and 2.0 (meaning €1.50 - €2.00 in current assets for every €1.00 in current liabilities).
Too little working capital creates stress and limits growth, while too much might mean you're not investing efficiently in your business's development.
You can boost working capital by accelerating customer payments (for example by offering early payment discounts), negotiating longer payment terms with suppliers and reducing unnecessary inventory.
Many founders also consider supplier financing arrangements to bridge temporary working capital gaps.
Warning signs include consistently struggling to pay suppliers on time, declining working capital ratios over several months, or needing to delay your own salary to cover basic expenses.
If you're regularly using expensive short-term financing just to keep operations running, it's time to reassess your working capital management and overall business funding strategy.
