What is Working Capital?

Working capital is the difference between a company's current assets and its current liabilities, measuring the short-term liquidity available to fund day-to-day operations.

Positive working capital means the business can cover its short-term obligations from short-term resources. Negative working capital is a warning sign — though some efficient retailers (supermarkets, Amazon) deliberately run negative working capital by collecting from customers before paying suppliers.

Working capital management focuses on three levers: shortening receivables, lengthening payables (without souring relationships) and minimising inventory. Each franc freed up is a franc that no longer needs to be financed.

Formula

Working Capital = Current Assets − Current Liabilities

Example

A trading company has CHF 800k of current assets (cash, receivables, stock) and CHF 500k of current liabilities (payables, short-term debt) — working capital is CHF 300k, enough buffer to weather a slow month.

Related terms

Accounts Receivable

Accounts receivable (AR) is the money owed to a business by its customers for goods or services delivered on credit but not yet paid for, recorded as a current asset on the balance sheet.

Accounts Payable

Accounts payable (AP) is the money a business owes its suppliers for goods or services received but not yet paid for, recorded as a current liability on the balance sheet.

Cash Flow

Cash flow is the net amount of cash moving into and out of a business during a period, measuring the actual liquidity created or consumed rather than accounting profit.

Balance Sheet

The balance sheet is a financial statement that shows a company's assets, liabilities and shareholders' equity at a single point in time, governed by the accounting equation Assets = Liabilities + Equity.

Frequently asked questions

What is the working capital ratio?+

Current assets divided by current liabilities; a value above 1 indicates short-term solvency.

Why does growth consume working capital?+

Faster sales mean more inventory to hold and more customer credit to extend before cash returns.

Can negative working capital be good?+

Yes, for businesses with fast cash collection and long supplier terms — they get financed by their own operations.