Treasury
Many profitable businesses go under for lack of working capital. Learn to calculate it, interpret it and improve it before it's too late.
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Create a free accountWorking capital is one of those concepts that sounds technical but that any business owner should be able to understand in under 10 minutes. Because when it breaks down, plenty of profitable businesses go under. Not because they lost money, but because they didn't have cash available when they needed it.
In this guide we explain what working capital is, how to calculate it, what levels are healthy for your industry, and what to do if yours is negative or very tight.
Working capital (also called net working capital or circulating capital) is the difference between what you have available in the short term and what you owe in the short term. In accounting terms:
Current assets: cash, accounts receivable, inventory | Current liabilities: debts due within 12 months
Put simply: if you had to pay tomorrow everything you owe this year, could you cover it? Working capital answers that question.
Picture a small business with these balances at the end of the month:
Working capital = $85,000 − $55,000 = $30,000 positive. The company has breathing room. It could cover all of its immediate obligations and still have liquidity left over.
The sign of your working capital is not neutral. Here is what it tells you:
You have more liquid assets than immediate debts. You can operate with peace of mind, absorb surprises and seize opportunities. The ideal for most small businesses.
You owe more than you have available in the short term. It is not always a sign of insolvency (Amazon does it on purpose), but for small businesses it is usually a serious warning sign.
Some business models operate perfectly well with negative working capital. Supermarkets and e-commerce platforms collect cash from their customers up front but pay their suppliers in 60-90 days. That means they always owe more than they have, but the business works because cash comes in before it goes out. This model is known as financial float, and it is a huge competitive advantage.
If you run a services or manufacturing business, on the other hand, negative working capital is a sign of trouble.
To compare companies of different sizes, you use the current ratio (also called the liquidity ratio):
A ratio of 1.5 means you have $1.50 available for every $1 you owe
General benchmarks:
These are the invoices you have issued that your customers haven't paid yet. The more days it takes you to collect (Days Sales Outstanding), the more working capital you need. A company that invoices on 60-day terms needs almost twice as much working capital as one that gets paid on the spot.
Key action: shorten your collection terms. Offer early-payment discounts, automate reminders, and consider factoring if necessary.
Inventory is tied-up capital. Every dollar sitting on a shelf is money you can't use to make payroll or invest. The key is finding the balance between not running out of stock and not having too much piled up.
What you owe your suppliers. Here the strategy is the opposite: you want to pay as late as possible (without damaging the relationship or incurring penalties). Every extra day of terms with your suppliers frees up working capital.
If you charge annual subscriptions up front, that is incoming working capital at no cost. If you pay rent or insurance in advance, you tie up capital. Review which expenses you can move to monthly payments.
One way to visualize working capital is through the Cash Conversion Cycle (CCC): how many days pass between paying your costs and collecting from your customers.
DSO: days to collect | DIO: days of inventory | DPO: days to pay
A CCC of 30 days means you need to finance 30 days of operations on your own. A negative CCC (like the supermarket chain Mercadona, or Amazon) means your customers finance your operations. That is the ideal goal.
Keep an eye on these indicators:
Hayes Strategic calculates your liquidity ratio and working capital automatically. No spreadsheet.
Working capital isn't just another number on your balance sheet. It is the difference between a business that operates with confidence and one that lives checking its bank account every Monday. A solid P&L won't save you if you don't have cash when you need it.
The good news is that working capital is manageable. With the right metrics and a monthly review, you can keep optimizing it continuously. That is exactly what Hayes Strategic does for you: it keeps these metrics always visible so you can make decisions before the problem arrives.