# What is Working Capital?

What is Working Capital? The difference between current assets (cash, inventory, receivables) and current liabilities (payables, short-term credit).

## How it works 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.

## Related metrics

- Cash Flow — working capital = short-term cash flow
- Inventory — large inventory means low working capital
- Net Terms — supplier payment terms have an impact
- Inventory Financing — a solution for low working capital

## 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.

## Real-world 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.

## Where to start

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.

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Category: Finance · From the [Jimmy OS KPI Glossary](https://jimmy-os.com/glossary/kpi.md) · Source page: https://jimmy-os.com/glossary/kpi/working-capital