Glossary
Working capital
Current assets minus current liabilities: the short-term cushion a company has to pay its bills over the next year from assets it can turn into cash.
On this page
Working capital is the difference between a company's current assets (cash, receivables, inventory and anything else expected to become cash within a year) and its current liabilities (bills, short-term debt and other obligations due within a year). It measures short-term financial health: whether the business can meet its near- term obligations without borrowing or raising money.
How it works
Reading it in context
More is not always better. Positive working capital is reassuring, but a large figure can also mean money tied up in slow-moving inventory or customers who pay late. Some strong businesses run with negative working capital on purpose: a large retailer or subscription company may collect from customers before it pays its suppliers, so suppliers effectively fund its operations.
For cash-flow analysis, the change in working capital matters. A growing company that must stock more inventory and extend more credit uses cash, which reduces operating cash flow even when net income rises. That is why the cash-flow statement adjusts net income for working-capital changes. Compare companies within the same industry, since normal levels vary widely.