Working Capital: The Lifeblood
The cash tied up in running the business day to day, and why too much or too little both hurt.
Working capital = Current assets − Current liabilities
The short-term funds tied up in day-to-day operations (inventory + receivables − payables).
Working capitalShort-term assets minus short-term liabilities. is the money sloshing through the business cycleThe economy’s rhythm of expansion and contraction.: buy materials → make goods → sell on credit → collect cash → repeat. The longer cash is stuck in inventory and unpaid invoices, the more capital the business must tie up just to run.
The best businesses need little or even negative working capitalShort-term assets minus short-term liabilities. — they collect from customers before paying suppliers (think a retailer paid instantly but paying suppliers in 60 days). That’s suppliers funding the business for free. Conversely, ballooning working capitalShort-term assets minus short-term liabilities. silently drains cash even when profits look fine.
ExampleTwo companies both report ₹10 cr profit. One collects cash instantly; the other waits 120 days for payment and stocks huge inventory — so its “profit” is locked in receivables and shelves, not the bank. The first is far healthier despite identical net profit.
Key takeawayWorking capitalShort-term assets minus short-term liabilities. is cash tied up in operations (current assets − current liabilities). Low or negative is a strength; rising working capitalShort-term assets minus short-term liabilities. quietly drains cash.
FAQs
How can working capital be negative — isn’t that bad?
For many strong businesses it’s excellent: it means current liabilities (e.g. supplier credit, customer advances) exceed current assets, so others are effectively financing day-to-day operations. It’s only a worry if it stems from inability to pay bills rather than favourable terms.