Finance
Working capital
Current assets minus current liabilities — the short-term cash position that funds day-to-day operations, including inventory, receivables, payables, and operating cash.
In plain English
How much cash you have available to run the business after netting out what customers owe you and what you owe suppliers. The shorter your working capital cycle, the less external capital you need.
Example
Cash: $200k. Receivables: $80k (customers paying in 30 days). Inventory: $100k. Current liabilities: $90k (suppliers, payroll). Working capital = $200k + $80k + $100k − $90k = $290k. Working capital cycle: time from cash going out to cash coming in (typically 30-90 days for SaaS, 60-120 for DTC).
Formula
Working capital = Current assets − Current liabilities Working capital cycle = DSO + DIO − DPO (Days Sales Outstanding + Days Inventory Outstanding − Days Payables Outstanding)
Why it matters
Working capital is the silent killer of fast-growing companies. Growing revenue requires more inventory (DTC), more accounts receivable (B2B), and more salaries paid up front. If your working capital cycle is 90 days and you triple revenue, you triple the cash trapped in operations — even profitable companies run out of cash.
Common mistakes
- Treating revenue growth as cash generation — growing companies often have NEGATIVE operating cash flow because working capital expands
- Underestimating receivable timing in B2B — Net-60 means the cash arrives 60 days after the invoice, which is 90+ days after you started the work
- Holding too much inventory — every dollar of inventory is a dollar of cash you can't deploy
- Forgetting that payroll is a working-capital line — salaries paid bi-weekly are a perpetual cash outflow