What is working capital management? Metrics, strategies, and common pitfalls

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Stripe Capital provides access to fast, flexible financing so you can manage cash flows and invest in growth.

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  1. Introduction
  2. What is working capital management?
  3. What are the components of working capital?
  4. What are the main goals of working capital management?
  5. What strategies help improve working capital management?
    1. Collect payments faster
    2. Take full advantage of payment terms
    3. Move inventory faster
    4. Control operating expenses
    5. Use better data
    6. Keep a cushion
    7. Use short-term financing smartly
  6. What tools and metrics are used to track working capital?
    1. Net working capital
    2. Current ratio
    3. Quick ratio
    4. Cash conversion cycle
    5. Working capital turnover ratio
  7. What challenges do businesses face with working capital management?
    1. Uneven demand and seasonality
    2. Late payments from customers
    3. Inventory that sits for too long
    4. Supply chain disruptions
    5. Internal inefficiencies
    6. Fast growth
    7. Tighter credit conditions
  8. How Stripe Capital can help

Even profitable businesses can run out of money if their timing is off. Maybe bills come due before payments land, inventory moves slower than expected, or a supplier delay leaves cash tied up on the wrong end of the cycle. Working capital management is how you avoid that trap and keep your business flexible, stable, and ready to act. Below, we’ll explain what you need to know about working capital management: what it is, the tools and metrics that track it, and how businesses can improve it.

What’s in this article?

  • What is working capital management?
  • What are the components of working capital?
  • What are the main goals of working capital management?
  • What strategies help improve working capital management?
  • What tools and metrics are used to track working capital?
  • What challenges do businesses face with working capital management?
  • How Stripe Capital can help

What is working capital management?

Working capital is the money a business uses to fund operations—to pay suppliers, keep inventory stocked, cover payroll, and more. It’s calculated as current assets minus current liabilities, and it tells you whether there’s enough cash moving through the business to keep it running.

When working capital is strong, you can pay bills, buy inventory, and cover short-term costs without borrowing. When it’s not, even profitable businesses can face difficulties. Good working capital management makes a business more stable, more flexible, and more ready to grow. It helps you avoid crunches, reduce reliance on outside capital, and take advantage of opportunities when they appear.

What are the components of working capital?

Managing working capital means managing two categories on your balance sheet: current assets and current liabilities. Cash, receivables, inventory, and payables are the main components of these categories, and each one affects how quickly money moves through the business and how much of it gets stuck along the way. Here’s a closer look:

  • Cash or cash equivalents: This is the most liquid part of working capital. You need enough on hand to cover day-to-day expenses such as rent, salaries, and bills. But holding too much means money isn’t being put to work elsewhere.

  • Accounts receivable: This is money owed to you. The longer customers take to pay, the longer your cash is tied up. Managing it involves setting good credit terms, invoicing quickly, and ensuring collections don’t slip.

  • Inventory: This is the products or materials you’ve paid for but haven’t sold yet. Every unsold unit is cash that’s sitting on a shelf. The goal is to keep inventory lean: you should have enough to meet demand, but not so much that you’re overstocked and overexposed.

  • Accounts payable: This is what you owe others. Timing matters here. Paying too early can drain cash you might need elsewhere, while paying too late risks fees or strained relationships. Use your full payment terms without missing deadlines.

These components form a cycle: you spend cash on inventory, sell it (often on credit), wait to collect, and use that cash to pay your own bills. If any part of the cycle slows down—for instance, a customer delays payment or inventory begins to pile up—that cycle can break. Working capital management focuses on keeping the cycle moving so cash doesn’t get stuck in the system.

What are the main goals of working capital management?

Working capital management is about assuring that your business can keep running and respond to opportunities without being restricted by issues of timing.

Here’s what good working capital management helps you do:

  • Cover the basics: Most businesses need to pay rent, payroll, supplier invoices, and taxes. Managing working capital means having the cash on hand to pay those when they’re due.

  • Keep operations running: You can replenish inventory on time and fulfill customer orders. And you don’t miss out on revenue because cash got stuck in the wrong place.

  • Use your money better: Every dollar that’s tied up in inventory or a slowly paid receivable is a dollar you can’t use elsewhere. Managing working capital well is about getting that money moving again faster.

  • Rely less on borrowing: The tighter your cash cycle is, the less you need to pull from a line of credit or short-term loan just to cover expenses. That means lower financing costs and more breathing room.

  • Create flexibility: When your working capital is in good shape, you can say yes to opportunities without waiting for a payment to clear. You can launch a product, take advantage of a discount, or hire someone.

  • Signal strength: Lenders and suppliers notice when you pay on time consistently. That can help you build better relationships and earn better terms.

Good working capital management gives you the ability to respond, adapt, and move when it counts.

What strategies help improve working capital management?

Working capital gets stuck when money moves too slowly through the business. These strategies can help loosen it.

Collect payments faster

Set firm payment terms, invoice promptly, and follow up early. Even a small drop in days sales outstanding (DSO), the average number of days it takes to collect payment, can meaningfully improve cash flow. You can also try offering small early payment discounts if that brings in cash sooner. And monitor habitual late payers so you can tighten terms when needed.

Take full advantage of payment terms

Don’t pay suppliers early unless there’s a real benefit to doing so. Stretch payments to the end of the agreed term, and negotiate longer terms where possible. Prioritize payments based on due date, not arrival date. If early payment discounts save more than your cost of capital, take them. Otherwise, hold the cash.

Move inventory faster

Inventory is cash in disguise. Track turnover rates and identify what’s moving slowly, then reorder based on real demand. Tighten safety stock buffers without running out.

Control operating expenses

Look for low-friction ways to reduce outflows. Audit recurring expenses and cancel what’s unused, renegotiate vendor contracts when doing so makes sense, and automate where doing so cuts labor hours or improves accuracy.

Use better data

Real-time visibility into receivables, payables, and inventory makes it easier to catch problems early. Set up dashboards for working capital metrics, monitor trends monthly, and forecast cash flow on a rolling basis so you’re not surprised by timing gaps.

Keep a cushion

Even with solid planning, the unexpected can happen. A client pays late, demand peaks, or a shipment gets stuck. Maintain a cash buffer or line of credit to cover gaps and treat it like insurance: ideally unused but there when you need it. Diversify where it matters, too, by spreading risk across customers and suppliers when you can.

Use short-term financing smartly

Sometimes a gap is unavoidable. A short-term loan or merchant cash advance can keep operations running. Draw on credit to fund growth or buy inventory if the return is higher than the cost. Use tools like Stripe Capital that scale with your revenue so you’re not locked into rigid monthly payments.

What tools and metrics are used to track working capital?

The right metrics make working capital visible and give you early warnings when something’s off.

Here are the metrics you should watch and formulas for calculating them.

Net working capital

Net Working Capital = Current Assets – Current Liabilities

This is the basic figure of what you have available to meet short-term obligations. When tracked over time, it shows whether your liquidity cushion is growing or shrinking.

Current ratio

Current Ratio = Current Assets ÷ Current Liabilities

A current ratio between 1.5 and 2.0 is usually considered healthy. A ratio that’s too low signals risk, while a ratio that’s too high might mean you’re sitting on underused resources.

Quick ratio

Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities

This is almost the same as the current ratio, but it excludes inventory. It shows whether you can meet short-term obligations without relying on selling inventory. It’s a more conservative liquidity check, and it’s especially useful if inventory sells slowly.

Cash conversion cycle

Cash Conversion Cycle = Days Inventory Outstanding + DSO – Days Payables Outstanding

This is the number of days it takes to turn cash spent into cash received.

Days inventory outstanding is the average number of days you hold inventory before it’s sold. DSO is the average number of days it takes you to collect payment from sales made on credit. Days payables outstanding is the average number of days it takes you to pay outstanding invoices owed to suppliers or vendors. Together, they give you an overview of your cash flow cycle.

Working capital turnover ratio

Working Capital Turnover Ratio = Net Sales ÷ Net Working Capital

This shows how effectively you’re using short-term assets to drive revenue. The higher it is, the better.

You can use the following tools to watch these metrics and more:

  • Accounting software: Your balance sheet and cash flow statements already hold most of this information. Pull ratios directly or use built-in dashboards.

  • Aging reports: Break down receivables and payables by due date to flag overdue invoices and upcoming obligations.

  • Inventory systems: Track movement, reorder points, and obsolete stock in real time.

  • Cash flow forecasts: Use these forecasts to anticipate timing mismatches before they occur.

  • Dashboards and key performance indicators (KPIs): Many teams build real-time dashboards to monitor liquidity metrics, overdue invoices, and inventory turnover.

  • Benchmarking tools: Compare your metrics to industry norms for context. A DSO of 45 days might be ideal or slow, depending on your industry.

What challenges do businesses face with working capital management?

Working capital is full of variables that can cause challenges.

Uneven demand and seasonality

Sales don’t happen on a fixed schedule. If your business is seasonal or demand fluctuates, you’ll need to invest in inventory ahead of time and wait for payments later. That gap can stretch working capital thin, especially if forecasts are off or up-front costs are high.

Late payments from customers

When customers delay payment, your cash stays locked up while your bills keep coming. Even small delays across many accounts can add up fast. This is made worse if one big customer holds the bulk of your accounts receivable.

Inventory that sits for too long

Excess or slow-moving stock ties up cash and takes up space. It’s easy to overorder “just in case,” particularly after running out of stock. But every unit that sits unsold is money you can’t use elsewhere.

Supply chain disruptions

Delays, shortages, and vendor issues can force you to hold more inventory, pay premiums, or work with partial shipments. They can surprise even businesses with strong working capital discipline.

Internal inefficiencies

Sometimes the problem is in the process. Late invoicing, poor follow-up on collections, misaligned teams, or outdated systems can all slow down the cycle. Finance, sales, and operations need to be on the same page.

Fast growth

Scaling up can actually strain working capital. You’re spending more on inventory, hiring, or infrastructure before revenue catches up. If your cash conversion cycle isn’t tight, growth can become a liability.

Tighter credit conditions

If access to capital dries up or interest rates peak, it’s harder to plug gaps with short-term financing. That puts more pressure on internal cash flow and exposes weak points in how you manage receivables, inventory, and payables.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow or cover short-term gaps.

Capital can help you do the following:

  • Access growth capital faster: Get approved for a loan or merchant cash advance in minutes, without the lengthy application process and collateral requirements of traditional bank loans.
  • Align financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales so payments scale with your business’s performance. If the amount you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  • Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more, without diluting your equity or personal assets.
  • Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payment data.

Learn more about how Stripe Capital can fuel your business growth, or get started today.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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