Working Capital

Working capital is the cash buffer from short-term assets minus short-term liabilities.

A quick example

Picture this

A manufacturer’s customers start paying 60 days late while its suppliers demand payment in 15. Its working capital turns negative, and the company must draw on credit lines just to buy raw materials, even though its order book is full. A rival with a 90-day cash buffer rides out the same squeeze without borrowing. The scenario is how liquidity crises start: not with a loss, but with timing — when money coming in slows and money going out does not.

What it means for you

It shows whether a firm can pay its bills without scrambling.

How to apply it

Track working capital trends: steadily falling working capital can signal a liquidity crunch building beneath healthy headline earnings. For a company with negative working capital, understand the business model before judging it.

Common mix-ups

Negative working capital is not always bad (some models run on it), but it signals tightness.

Key takeaway

Working capital is the short-term cash buffer between what a company must pay soon and what it can collect soon, and it is where liquidity crises are born. Positive working capital cushions the business; negative means relying on rolling obligations, which works for some models and is fatal for others. Track the trend, because steadily falling working capital can signal strain beneath healthy earnings. Cash-flow problems rarely announce themselves; they arrive as timing mismatches.

Definitions reviewed by the Investing Glossary editorial team.