Let’s skip the jargon for a second.
If cash flow is the heartbeat of a business, then working capital is its oxygen.

Without it, even profitable businesses can run out of breath.

So what is working capital? Why does it matter? And how do businesses manage it wisely?

Let’s break it down.

What is Working Capital?

At its core, Working Capital = Current Assets – Current Liabilities

In simpler terms:

It’s the money a business has to run its day to day operations such as paying bills, buying stock, covering salaries, and surviving gaps between payments.

Current assets include cash, accounts receivable (money customers owe you), and inventory.

Current liabilities are things you need to pay soon, like short term loans, rent, and bills from suppliers.

Why working capital matters

Plenty of businesses go bankrupt not because they’re unprofitable, but because they run out of cash when they need it most.

That’s where working capital steps in:

Need to buy raw materials before your customer pays you? Working capital covers that.
Employees need salaries on the 1st, but clients pay on the 15th? Working capital keeps you afloat.
Want to grow but your cash is stuck in unsold inventory? That’s poor working capital management.

Positive vs Negative working capital

Positive working capital means your short term assets exceed your short term liabilities, which is a good sign.
Negative working capital means you owe more than you own in the short term, this is risky, unless you’re running on a very tight operating cycle like some retail giants.

Key components of working capital

To manage working capital, you need to manage these three pillars:

1. Accounts Receivable
How quickly do your customers pay you? The longer they take, the more your money is stuck.

2. Inventory
Are you holding too much stock? Inventory sitting on shelves = cash that could be better used elsewhere.

3. Accounts Payable
How soon do you pay your suppliers? Smart businesses negotiate longer credit terms to stretch their cash flow.

Metrics that actually matter

A few simple ratios can help track how efficiently a business is managing working capital:

Current Ratio = Current Assets / Current Liabilities
(Shows short-term financial health)
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
(Stricter version, removes inventory)
Working Capital Cycle = Days Inventory + Days Receivable – Days Payable
(Shorter = better. It tells you how long money stays stuck in the cycle)

You can read more about this in my article here.

A real life scenario

Imagine a clothing company with:

₹5,00,000 in cash, inventory, and receivables
₹3,00,000 in short term bills and loan payments

That gives it ₹2,00,000 in working capital. Sounds healthy, right?

Not necessarily.

If most of that ₹5,00,000 is locked up in unsold inventory, and customers take 60 days to clear payments, while employee salaries and rent are due every 30 days, then the business may struggle to stay liquid.

This is where many businesses get caught:
It’s not just about how much capital you have, but how fast it moves.

How smart businesses stay ahead (and you can too)

Negotiate longer credit periods with suppliers to reduce outflow pressure
Offer early payment discounts to customers to speed up inflows
Use demand forecasting to avoid overstocking and free up cash
Keep inventory lean, especially for slow moving products
Maintain a liquidity buffer for unexpected shortfalls

Great working capital management isn’t aggressive, it’s strategic.
The goal is control, not chaos.

So in conclusion,

Profit might impress investors, but working capital keeps the business alive.
It’s the cash you can actually use, when you need it.

Think of it like fuel in the tank, not the size of the car.
Even a luxury business can stall without it.

So whether you’re managing operations or evaluating companies, remember:

Working capital isn’t just about staying in business , it’s about moving forward.

Until next time,
Pavit Kaur

[LinkedIn]

Managing What Keeps a Business Alive: A Beginner’s Guide to Working Capital