Working Capital Explained

What working capital means

Working capital is the difference between what your business owns in the short term (cash, unpaid invoices to you, inventory) and what it owes in the short term (unpaid supplier invoices, short-term loans).

Why it matters for small business

Positive working capital means you can pay this month's bills without scrambling. Negative working capital means your short-term obligations are larger than your short-term resources — a warning sign even if the business is profitable.

Simple formula

Current assets: cash, money customers owe you (accounts receivable), inventory.
Current liabilities: what you owe suppliers, short-term loans, taxes due soon.

Practical example

A small shop has:

• Cash: $4,000
• Customer invoices unpaid: $2,000
• Inventory: $6,000
• Unpaid supplier bills: $5,000
• Short-term loan payment due: $1,500

Practical interpretation

• Positive working capital = breathing room.
• Negative working capital = depending on future sales or credit to pay current bills.
• Too much working capital can also be inefficient — lots of cash and inventory sitting idle.

Common mistakes

• Treating inventory as cash. Stock has value, but you can't pay rent with it.
• Forgetting tax obligations. Taxes owed are real short-term liabilities even before they're paid.