Working Capital
The difference between current assets (cash, inventory, receivables) and current liabilities (payables, short-term credit). A liquidity metric — the business's ability to fund day-to-day operations. Positive working capital = healthy.
In practice
Working capital is the 'cushion' that lets a business breathe. A store with $56K in unsold inventory + $22K owed to suppliers has low working capital. That's a normal state — but during peak season, when you need to buy more inventory and have no cash, it's a problem.
Common misconception
'Working capital is always better when high.' Working capital that's too high means money sitting idle. If $140K sits in cash and isn't invested in growth, that's a mistake. The balance: enough working capital for liquidity plus investing surplus in growth.
How to fix it
Negative working capital? (1) Increase inventory turns — sell inventory faster, (2) Negotiate longer net terms with suppliers, (3) Shorten receivables — B2B customers paying late, (4) Inventory financing — a loan from Fundbox, Clearco.
Example
Apparel store: $105K inventory, $26K cash, $78K owed to suppliers. Working capital = $131K - $78K = $53K. Ahead of summer season, suppliers require an additional $55K. Working capital isn't enough. Solution: $28K in inventory financing ← got through the season.
Priority
Calculate working capital at the start of every quarter. Formula: current assets - current liabilities. Healthy ratio: current ratio above 1.5 (for every $1 of debt, $1.50 in assets). Below 1 is unhealthy.
Related terms
Keep learning. Metrics that touch the same area:
- Cash FlowFinanceThe movement of cash in the business. 'Profitable on paper, broke in the bank' — a common problem in growing stores.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
Jimmy tracks your Working Capital, automatically
WhatsApp alerts when something important changes. No dashboards, no hassle.