Working Capital
Definition
The short-term cash cushion your business runs on: current assets (cash, receivables, inventory) minus current liabilities (payables, credit cards, short-term loans).
Want a deeper explanation?
Formula
Working Capital = Current Assets − Current LiabilitiesWorking capital tells you whether you can cover the bills coming due in the next year with what you have on hand. For inventory businesses the catch is that much of it is stock, which cannot pay a supplier or payroll until it sells.
That is why the mix matters as much as the total. Watch for: working capital that looks healthy on paper while the bank balance stays tight, which means too much of it is sitting on shelves.
Example
$150,000 cash, $40,000 receivables and $250,000 inventory against $180,000 of current liabilities gives $260,000 of working capital, most of it locked in inventory.