To stay in business, companies need ongoing access to cash to cover bills, payroll, and unexpected expenses. The amount of cash that’s needed to keep a business running is called working capital, and it’s an important figure to calculate and track over time.

Below, you’ll find a deeper look at what working capital requirements (WCRs) entail—and how to manage them with clarity, control, and fewer surprises.

What’s in this article?

• What is the working capital requirement?
  
• How to reduce your working capital requirement
  
• Considerations when reviewing your working capital requirement
  
• How growth impacts your working capital needs
  

What is the working capital requirement?

Your business’s working capital requirement (WCR) is the cash it needs to cover its day-to-day operations. Your business could need working capital to:

• Bridge timing gaps between when you pay for goods and when customers pay you
  
• Cover payroll, rent, vendor payments, and utilities
  
• Take advantage of opportunities, such as bulk discounts, quick turnaround projects, or new contracts that require upfront spending
  

You might be profitable on paper, but if your receivables come in weeks after you’ve paid suppliers, you’re still at risk of a cash crunch. For this reason, many businesses use short-term financing tools such as Stripe Capital to secure the flexible funding they need.

To calculate your business’ WCR, use the following formula:

Working Capital Requirement (WCR) = (Inventory + Accounts Receivable (AR)) – Accounts Payable (AP)

Here’s what each component means:

• Accounts receivable (AR): This is revenue you’ve earned but haven’t collected. Think of it as capital that belongs to you but is still sitting in someone else’s account.
  
• Inventory: This includes your raw materials, goods in production, and finished products. Inventory consumes working capital until it’s sold and the customer has paid.
  
• Accounts payable (AP): This is money you owe suppliers and vendors. When properly managed, AP acts as a source of short-term financing.
  

The ways in which these components interact—how quickly you turn over inventory, how fast you collect invoices, and how long you take to pay vendors—determines how much capital you need to keep things operational.

Some business models, such as big-box retailers, can purposely run with negative working capital by selling goods and collecting customer payments before they need to pay their suppliers. But for most businesses, staying positive is the focus. Either extreme can be a problem: too little working capital can stall growth, while too much means you’re sitting on idle cash that could be put to work elsewhere.

How to reduce your working capital requirement

Businesses can work to strategically lower their WCR and run leaner operations with several strategies. Here are some tips for how to keep WCR low or ensure it doesn’t increase.

Be smart about inventory

Holding too much stock ties up cash that could be put to better use. Use demand forecasts and inventory management software to make smarter purchasing decisions, and regularly revisit your reorder points.

Just-in-time (JIT) inventory systems can help, but they aren’t right for every business. The goal is to hold just enough inventory to meet demand without risking running out of stock entirely. The more precise your inventory levels, the less cash you have sitting on shelves.

Get paid faster

The longer it takes customers to pay you, the more working capital you need to keep operations going. To shorten those cycles, bill promptly, send reminders, and tighten up your payment terms. Incentivize early payments with small discounts if it makes sense for your business.

Some businesses even assign team members to keep an eye on key accounts to make sure payments don’t fall through the cracks. Faster collections shorten your cash cycle and reduce your WCR.

Negotiate supplier terms

Delaying payments—within reason—gives you more breathing room. If you can move from 30-day terms to 45- or 60-day terms, you’ll extend the amount of time you can stay operational. Suppliers are often more open to negotiation than you might think, especially if you can offer volume commitments or partial prepayment.

Strong supplier relationships also open the door to early payment discounts or more flexible buy now, pay later (BNPL) terms, which can directly improve cash flow.

Use short-term financing

When operations alone can’t close a cash flow gap, financing can be a bridge. Options such as a business line of credit, a working capital loan, or a merchant cash advance can give you access to cash without locking you into long-term debt.

Stripe Capital, for example, offers fast, flexible funding based on your payment volume and history. You automatically repay as you earn, so it adjusts with your sales cycle. This tool is especially useful during seasonal dips, unexpected delays, or when you’re scaling fast and need to cover costs before revenue catches up.

Considerations when reviewing your working capital requirement

Your WCR is a reflection of how well your business moves money. To get a clear view of this metric, you need to look at all the forces in motion. Here’s where to focus.

Liquidity and the current ratio

Your current ratio (i.e., current assets divided by current liabilities) is a quick way to gauge whether you have enough liquid assets to cover short-term obligations. Here’s how to interpret your ratio:

• Below 1.0: This signals trouble. It means you don’t have enough current assets to meet upcoming bills.
  
• Between 1.5 and 2.0: This is typically considered a healthy range to be in. It means you have enough cushion without idle cash.
  

Be sure to also monitor your quick ratio—also called an acid-test ratio—which strips out inventory to focus on your most liquid assets. If either ratio starts to slide, take a closer look at how to collect cash faster or trim short-term liabilities.

Accounts receivable

Slow-paying customers raise WCRs fast. Watch the average number of days it takes you to get paid—known as days sales outstanding (DSO)—and take action if the number starts creeping up. The goal isn’t just to get paid, but to get paid sooner.

Inventory

Inventory often soaks up a lot of cash for businesses that sell physical products. Review how long it takes you to turn stock into sales. Are you overordering? Are items sitting unsold? Do you have deadstock taking up space? You should aim to:

• Move inventory faster
  
• Speed up customer payments
  
• Stretch supplier payments where reasonable
  

Lean inventory strategies, such as just-in-time (JIT) ordering or demand-based replenishment, can reduce your working capital needs without hurting fulfillment. In businesses with perishables, systems such as First In, First Out (FIFO) help prevent spoilage and waste.

Accounts payable

Paying your bills too early drains cash, while paying too late can strain supplier relationships. Strike a balance with your days payable outstanding (DPO)—i.e., the average number of days it takes your company to pay its bills. To optimize this number:

• Negotiate longer terms where possible
  
• Pay on time, not early
  
• Take advantage of early payment discounts only when they genuinely benefit your bottom line
  

Small shifts in payment timing (e.g., day 45 vs. day 30) can make a meaningful difference in cash flow and WCR.

Short-term debt and financing options

If you’re relying on business credit lines or short-term loans, assess the pressure those payments are putting on liquidity. Be sure to ask yourself:

• Can any debt be refinanced or consolidated?
  
• Are there lower-cost options I haven’t explored?
  
• Could receivables or inventory be used as collateral for smarter financing?
  

For example, invoice factoring can quickly convert unpaid invoices into cash, but it comes with a fee, so it needs to be weighed carefully. Having multiple short-term funding options available means you won’t be forced into emergency borrowing when cash is tight.

Seasonality and industry cycles

Your WCR can shift dramatically depending on the time of year or the nature of your industry. Retailers often load up on inventory ahead of the holidays, manufacturers have heavy upfront raw material costs, and project-based firms might go months between invoices and payments.

Map your WCR against the rhythm of your business. Build up your reserves during cash-heavy periods so you’re covered during leaner ones.

How growth impacts your working capital needs

Growth is exciting, but it doesn’t fund itself. As your business expands, your WCR tends to rise as well. More sales often mean:

• More inventory to stock ahead of demand
  
• More customers with outstanding invoices
  

And critically, it all usually needs to be paid for before you actually see the corresponding revenue.

For example:

• A retail brand scaling up for the holiday season needs to invest in inventory months before revenue hits.
  
• A B2B software-as-a-service (SaaS) company landing larger clients might extend longer payment terms, which delays cash inflow.
  
• A manufacturing firm expanding into new markets needs to purchase raw materials in advance of customer orders.
  

The faster you’re growing, the more pressure there is on your liquidity. Even strong profit margins won’t protect you if you don’t have the cash to cover your costs.

To keep up, many companies layer in financing, such as working capital loans, lines of credit, or invoice financing, early on to fill gaps until sales catch up. Tightening up the mechanics of your working capital—with faster invoicing, smarter inventory, better terms with suppliers—helps keep that growth sustainable, too.

If you manage it well, a healthy WCR gives your business the time it needs to scale. But if you ignore it, even booming growth can land you in a liquidity crunch.