Working capital
AccountingDefinition
The cash cushion a business has to run day-to-day operations. Calculated as everything the company can convert to cash within a year (assets) minus everything it owes within a year (liabilities). Positive working capital means the company can pay its short-term bills from what it already has. Negative means it depends on continued sales or new financing to stay afloat.
Interesting twist: some great businesses actually run on NEGATIVE working capital because customers pay them BEFORE they pay their suppliers (Costco, early-years Amazon). That is essentially free financing from customers.
Interesting twist: some great businesses actually run on NEGATIVE working capital because customers pay them BEFORE they pay their suppliers (Costco, early-years Amazon). That is essentially free financing from customers.
Formula
Working capital = Current assets minus Current liabilities
Example
A retailer has $500M in inventory, $100M in cash, and $50M in receivables (money customers owe). That is $650M in current assets. If it owes suppliers $400M over the next 12 months, working capital is $650M - $400M = $250M.