Working capital
The cash tied up in running the business day to day.
Working capital is current assets (mostly inventory and money owed by customers) minus current liabilities (mostly money owed to suppliers). It is the money trapped inside the machine rather than available to you.
A growing company usually consumes working capital: it must buy stock and wait to be paid, which is why fast-growing firms can go bust while profitable. Some exceptional businesses run negative working capital, taking payment from customers before paying suppliers, which means growth actually generates cash. Supermarkets and subscription businesses often do this.
Working capital = Current assets − Current liabilitiesHow the three statements lock together
Profit flows from the income statement into the balance sheet as retained earnings, and the cash flow statement reconciles what was earned with what actually arrived.
Watch receivables and inventory against revenue. If either grows much faster than sales, the business is straining.
Assuming more working capital is better. It usually means more cash is stuck where you cannot use it.
Related terms
See Working capital on a real company
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