---
title: "What Is Working Capital?"
term: "Working Capital"
description: "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."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/working-capital
---

# What Is Working Capital?

> 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.

**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](/glossary/working-capital-peg) — target net working capital at close — with [adjustments](/glossary/working-capital-adjustment) 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](/glossary/working-capital-peg), [working capital adjustment](/glossary/working-capital-adjustment), and [variable cost](/glossary/variable-cost).

## FAQ

### What is working capital in simple terms?

Working capital is money tied up in everyday business — cash, inventory, money customers owe you — minus what you owe suppliers and short-term bills in the next year.

### Why does working capital matter?

For founders, negative or shrinking working capital can mean cash crunch even when revenue grows. For investors, M&A deals adjust price if working capital at close differs from targets.


---
Source: https://venturecapitaltracker.com/glossary/working-capital