Working capital represents the financial capacity available to support the daily operating cycle of a business after considering its immediate obligations.
Working capital is generally calculated by subtracting current liabilities from current assets. Current assets may include cash, customer receivables, inventory, short term deposits and other amounts expected to be realised. Current liabilities may include supplier payments, short term borrowings, taxes payable, employee-related obligations and other amounts due. A positive figure does not itself confirm enough cash is available.
Working capital is the money that keeps a business moving while it waits to receive payment from customers. A business may purchase material, pay employees, deliver the product and wait another sixty days for payment; working capital supports the gap between spending money and receiving it back.
A business pays a supplier ₹10 lakh for material. It remains in inventory for thirty days, is sold after another thirty days and the customer gets sixty days to pay. The original ₹10 lakh remains committed for approximately one hundred and twenty days while salaries, rent, transport, taxes and other expenses still need to be paid.
Customer receivables ₹40 lakh, inventory ₹20 lakh and cash ₹5 lakh total ₹65 lakh of current assets. Supplier payables ₹30 lakh and short term obligations ₹15 lakh total ₹45 lakh of current liabilities. Working capital is ₹20 lakh. Quality and movement of current assets matter as much as the total amount.
Signs include rising sales while the bank balance falls, delayed supplier payments, slower customer collections, inventory growing faster than revenue, routine short-term loans, cash surprises, profitable orders requiring more cash, and founders personally managing collections.
Working capital can influence credit periods, supplier terms, inventory, collection responsibility, pricing, short term borrowing, expansion, sales growth, production planning and customer selection. Growth should be assessed by the cash required to support it, not only by revenue.