What is working capital?

Working capital is the money tied up in the day-to-day running of your business. Ignore it and you can grow yourself straight into a cash crisis — profitable on paper, broke in the bank.

The definition

Working capital is your current assets minus your current liabilities — the short-term resources you can turn into cash, minus the short-term bills you owe. In plain terms, it's the cushion that funds normal operations.

The biggest pieces are usually the money customers owe you (receivables), the money you owe suppliers (payables), and any inventory you're holding.

Why growth eats cash

Here's the trap: when sales grow, you often pay for materials, inventory, and labor before your customers pay you. The faster you grow, the more cash gets locked up in that gap — even though your profit-and-loss statement looks great.

This is how a genuinely profitable business can run out of money. The profit is real; it's just tied up in receivables and inventory instead of sitting in the bank.

The three levers

You free up cash by pulling three levers: collect from customers faster (shorten receivables), pay suppliers on reasonable terms rather than early (lengthen payables sensibly), and hold less inventory.

Each one moves cash back into your account without changing your profit at all — which is why working-capital management is one of the quietest, most powerful cash tools a small business has.

Where it shows up in a forecast

A good cash-flow model treats changes in working capital as real cash movements: a growing receivables balance is cash leaving your account, a growing payables balance is cash staying in it.

The free runway calculator below tells you how long your current cash lasts; a full model shows exactly how growth and working capital pull on it month by month.

Questions