What is Working Capital?

 Anyone running a business needs a good sense of what working capital is and how to manage it properly. This is especially true for startups that are getting some revenue, but have a lot of moving parts for how cash comes in and cash goes out. If the settings are not right, you may run out of working capital and then require a credit facility / loans or other high costs of capital (much higher than simply using the revenue you earn to pay for your expenses).

Working capital is the amount of money a business has available to cover its day-to-day expenses, such as payroll, rent, inventory, and supplier bills. It represents the difference between a company's current assets (e.g. cash, accounts receivable, inventory) and its current liabilities (e.g. accounts payable, short-term loans, accrued expenses).

Working capital is essential for a business to operate smoothly and meet its short-term financial obligations. It can be affected by a variety of factors, including changes in sales volume, inventory levels, and payment terms with suppliers and customers. A positive working capital balance indicates that a business has enough liquidity to meet its short-term obligations, while a negative balance suggests that the company may struggle to pay its bills on time.

A tracking template designed for helping you raise your working capital is this cash conversion cycle tracker.

What happens when your working capital gets really bad? Well, basically you have to talk to your suppliers / vendors and try to push back payments terms to 60 or 90 days for starters. That is not a long-term fix, but will help get you caught up and stabilized once you start turning a profit again.

If you are generating a profit, it may still be a good idea to take a look at your cash balance over time. Having this be too high can mean there is investment potential being wasted, but being to low can result in late fees and bad vendor relationships.

If you are generating a net loss, then soon you will not have any working capital and extending terms is not going to help as eventually the losses will pile up, so the most important thing is to make sure your unit economics make sense.