VC & PE Glossary
What Is Working Capital?
Updated
Definition
Working capital is current assets minus current liabilities — the short-term liquidity buffer a company uses to fund inventory, receivables, and payables in day-to-day operations.
Useful for: Founders, Investors
Working capital measures short-term financial health — whether the company can cover near-term obligations from assets that will convert to cash within a year.
How it works
Formula: Current assets − current liabilities
Components often include:
- Assets: cash, accounts receivable, inventory, prepaid expenses
- Liabilities: accounts payable, accrued expenses, short-term debt
Positive working capital means more near-term resources than bills. Fast-growing companies can show negative working capital if they collect cash upfront (SaaS prepayments) — context matters.
Cash conversion cycle links working capital to operations: days inventory + days receivable − days payable. Hardware and marketplace businesses often need venture funding specifically to finance working capital swings.
In M&A, buyers set a working capital peg — target net working capital at close — with adjustments if actual differs.
Why it matters
- Founders: Seasonal ramps and large customer payment terms can drain cash while P&L looks fine. Model monthly balance sheet, not just burn.
- Investors: Venture debt and growth equity underwrite working capital needs; weak controls signal future covenant trouble.
Common mistake
Confusing working capital with total cash. You can hold cash while payables balloon — or show low cash with strong working capital due to credit lines.
Related ideas
See also working capital peg, working capital adjustment, and variable cost.
Related terms
- Variable Cost — Variable cost is spending that rises or falls directly with output — units sold, transactions processed, or customers served — as opposed to fixed overhead that stays flat regardless of volume.
- Working Capital Adjustment — A working capital adjustment is a post-closing purchase price change in M&A when the company's actual net working capital at close differs from the agreed target or peg.
- Working Capital Peg — A working capital peg is the target net working capital level agreed in an M&A deal — the baseline used to calculate post-closing purchase price adjustments.
Common questions
Short answers for founders, LPs, and operators