What is working capital?
Working capital is current assets minus current liabilities, the short-term funding a business runs on, which growth consumes when cash gets tied up in receivables or inventory. The SEC's beginners' guide describes it as the money left over if a company paid its current liabilities. In deal work, the term often means net working capital excluding cash and debt.
Why it matters to a revenue leader
Every sale on credit puts cash into receivables before it comes back. A services company growing fast with slow-paying customers can run short of cash while posting record revenue. In a PE transaction, the purchase agreement often sets a working capital target, so a build-up in receivables before closing can change the price. Payment terms, billing timing and retainage are commercial levers that move working capital.
How to calculate it
Working capital = current assets minus current liabilities. A common mistake is reading a rising number as good news, when it can mean slow collections or unbilled work piling up.
Example
Fictitious numbersA testing and inspection company grows revenue from $20 million to $26 million. Its customers pay in about 70 days, so receivables rise from roughly $3.8 million to roughly $5 million. That increase of about $1.2 million is cash the business must fund before customers pay.
"How much working capital will next year's growth plan consume, and who is funding it?"
Sources
- Beginners' Guide to Financial Statements (SEC) checked 9 Oct 2026
- Net Working Capital (Corporate Finance Institute) checked 9 Oct 2026