Working Capital

Working capital is the absolute-dollar counterpart to the current ratio: current assets minus current liabilities. Positive working capital means the company finances its own operating cycle; negative working capital means suppliers and short-term lenders are financing it. For trade creditors, working capital is the buffer that absorbs shocks — a lost customer, a slow quarter, a supplier demanding cash terms — before your invoice is at risk.

Because it is a dollar figure, working capital must be judged relative to the size of the business. $500,000 of working capital is ample for a $2M-revenue subcontractor and dangerously thin for a $50M distributor. Many credit policies express limits as a function of working capital or tangible net worth for exactly this reason — for example, capping exposure at 10% of a customer's working capital.

Watch how working capital moves against revenue. A company growing 30% a year consumes working capital fast: receivables and inventory grow ahead of the cash they generate. Growth companies that fail often fail solvent-on-paper but illiquid — they run out of working capital, not customers. Conversely, shrinking working capital in a flat-revenue business usually means losses or distributions are draining the tank.