Definition
Working Capital
Working capital is the money a company needs to fund day-to-day operations, calculated as current assets minus current liabilities.
Working capital funds the operating cycle, inventory, receivables, and payables. Positive working capital means a firm can cover short-term obligations; negative working capital can be efficient (as in some retail/FMCG models where suppliers fund the business) or a warning of stress.
Investors watch working capital trends: ballooning receivables or inventory may signal weak demand or aggressive accounting, while a tight, well-managed cycle frees up cash for growth. It ties directly to free cash flow quality.
Related terms
- Current RatioThe current ratio measures a company's ability to pay its short-term obligations using its short-term assets — calculated as current assets divided by current liabilities.
- Cash Conversion CycleThe cash conversion cycle measures how many days it takes a company to turn investments in inventory and receivables back into cash.
- Free Cash FlowFree cash flow is the cash a company generates after meeting operating expenses and capital expenditure — the surplus it can use to pay dividends, buy back shares, cut debt or grow.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.