What is Working capital? Definition, Formula & Benchmarks

What is working capital?

Working capital is the cash tied up in day-to-day operations, current assets minus current liabilities. It measures whether you have enough short-term resources (cash, receivables, inventory) to cover short-term obligations (payables, accrued expenses). Positive working capital means breathing room; negative can signal a looming cash crunch, even in a company that's profitable on paper.

Formula

Working Capital = Current Assets − Current Liabilities

Current Assetscash and assets convertible to cash within a year, like receivables and inventory
Current Liabilitiesobligations due within a year, like payables, accrued expenses, and short-term debt

Worked example

A company with $400K of current assets and $250K of current liabilities has $150K of working capital.

Why it matters for fast-growing companies

Growth eats working capital, as you scale, you often pay suppliers and staff before customers pay you, tying up cash. Plenty of profitable companies fail because they run out of working capital while growing. Watching it closely, and shrinking the gap between paying out and collecting, is how founders avoid growing themselves broke.

Frequently asked questions

Can a profitable company run out of working capital?+

Absolutely, and it's one of the most common ways growing companies die. Profit is an accounting concept; working capital is about timing. If you pay suppliers and payroll faster than customers pay you, you can be profitable on paper and still hit zero in the bank. Growth makes this worse, not better.

What's a healthy amount of working capital?+

It depends entirely on your business model, so there's no universal number. What matters is that current assets comfortably cover current liabilities and that you understand your cash conversion cycle, how long money stays trapped in receivables and inventory before returning as cash. Shorter cycles need less working capital to fund growth.

Working capital