Plain definition
Working capital is current assets minus current liabilities at a stated date. Current assets may include cash, receivables, inventory, and other amounts expected to be realised or used in the short term; current liabilities are obligations due in the short term.
It is a balance-sheet measure, not a cash balance. A positive amount does not prove that a company can pay tomorrow’s payroll: inventory may take months to sell and a large receivable may be overdue. For operating analysis, management often separately examines receivables, inventory, payables, and cash timing.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose a wholesaler reports current assets of and current liabilities of at month-end. Its working capital is . The assets include of inventory, of customer invoices, cash, and prepayments.
If a supplier payment is due next week while most inventory will not sell for six weeks and invoices are not due yet, the positive working-capital figure does not remove the need for a dated cash forecast.
| Current assets | |
|---|---|
| Current liabilities | |
| Working capital |
A company with negative working capital may be under pressure, but advance customer payments or rapid inventory turnover can also produce that pattern.
Why it matters
Growth can consume cash when inventory and customer credit rise before cash is collected. Looking only at revenue or total working capital can hide which operating item is absorbing cash and which action—collecting, buying less stock, or renegotiating supplier terms—can change it.
Practical consequence
Review working capital monthly and its main components weekly when cash is tight. Reconcile receivables to collection dates, inventory to sales and replenishment plans, and payables to due dates. Then show the resulting movements in the cash forecast rather than treating the month-end working-capital total as spendable cash.
Try your own numbers
Measure cash tied up in receivables and inventory, less supplier credit, then test a target cycle.
Working-capital cycle