Reading the accounts
Working capital
The money tied up in day-to-day operations: inventory and money owed to you, less money you owe.
How it works
Growing companies usually consume cash through working capital, because inventory and receivables grow with sales before the cash arrives.
Some businesses have negative working capital — customers pay before suppliers are paid — which means growth generates cash instead of consuming it. It is a powerful structural advantage.
Formula
Working capital = current assets − current liabilitiesRelated terms
- Operating cash flowThe cash a company actually generated from running its business.
- InventoryGoods a company is holding to sell, valued on the balance sheet at cost or market value, whichever is lower.
- Accounts receivableMoney customers owe for goods or services already delivered.
- Cash conversion cycleHow many days pass between paying for inventory and collecting cash from the customer.
Mentioned in
More in Reading the accounts
- Writedown
- Tangible book value
- Share-based compensation
- Accrual accounting
- Runway
- Adjusted earnings
- Revenue
- Assets
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.