Working Capital: What It Is and How to Stop It Choking Your Growth

What working capital is#

Working capital = Current Assets − Current Liabilities. Current assets: cash, accounts receivable (money owed by customers), and inventory — things that convert to cash within 12 months. Current liabilities: accounts payable (money owed to suppliers), short-term debt, and accrued expenses — obligations due within 12 months. Positive working capital means you have more short-term assets than short-term obligations. Negative working capital means your short-term obligations exceed your short-term assets — a sign of liquidity risk.

The working capital cycle#

For a product business: you buy from a supplier on 30-day terms. Goods sit in your warehouse for 20 days before being sold. The customer buys on 60-day terms. You receive cash 80 days after paying the supplier. Your business has funded 80 days of goods in the cycle. The longer the cycle, the more cash is required. The shorter the cycle — through faster sales, shorter payment terms, or longer supplier credit — the less working capital you need.

The three levers that control working capital#

Inventory days: how long goods sit in your warehouse before being sold. Reduce by improving demand forecasting, reducing safety stock where possible, and clearing slow-moving stock. Receivable days: how long customers take to pay you. Reduce by shortening payment terms, invoicing promptly, and chasing overdue payments systematically. Payable days: how long you take to pay suppliers. Extend by negotiating longer payment terms — not by paying late, which damages supplier relationships.

Working capital intensity of growth#

Working capital requirements grow with revenue — often faster than revenue itself. Doubling your revenue typically requires more than doubling your working capital if inventory days, receivable days, and payable days remain constant. This is why rapidly growing businesses frequently encounter cash crises despite strong profitability — the working capital requirement outpaces their ability to finance it from retained earnings.

Monitoring working capital with AskBiz#

AskBiz calculates your working capital metrics from connected accounting and inventory data. It monitors inventory days, receivable days, and payable days as continuous time-series metrics — alerting you when working capital is being consumed faster than normal. Ask it: what is my current working capital position, how has my receivable days changed in the last quarter, which customers are holding the most overdue balances.