Working capital is the cash you have available to pay your bills, restock inventory and stay operational. It's what keeps your business running. Changes in working capital can suggest smart planning, growth pressure or hidden inefficiencies, but the only way to know is to look closely at what's driving the change. Below, we'll explain how to calculate an increase in working capital, what that increase actually means and how to make it work for your business.

What's in this article?

• What is working capital?
  
• How do you calculate an increase in working capital?
  
• What causes an increase in working capital?
  
• Is an increase in working capital good or bad?
  
• How can you improve working capital efficiency?
  
• How Stripe Capital can help
  

What is working capital?

Working capital is the money your business has available for handling day-to-day operations. Here is the formula for it:

Working Capital = Current Assets - Current Liabilities

Current assets include anything you expect to convert into cash within a year: cash, accounts receivable and inventory. Current liabilities are what you owe within a year: accounts payable, taxes and short-term loans.

If your assets outweigh your liabilities, you have positive working capital. That means there's enough on hand to pay suppliers, make payroll and cover short-term expenses. If your liabilities outweigh your assets, you risk running out of cash.

Working capital reflects your liquidity and flexibility. It covers the time gap between when you spend and when you get paid. The more efficiently you manage that gap, the more freedom you have to make decisions. Efficient use of working capital in 2024 supported $15.6 million in average profit benefits for top-performing fleet and mobility growth companies.

How do you calculate an increase in working capital?

To figure out how much your working capital has increased, compare your net working capital (NWC) at two points in time.

For example, imagine your current assets were $500,000 and your current liabilities were $350,000 at the start of the year. Your working capital was $150,000.

At year-end, your assets were $540,000 and liabilities were $360,000. Your working capital was $180,000.

Here's how to calculate the increase in working capital:

Change in Working Capital = Beginning NWC - Ending NWC

This is the calculation for the example above:

Change in Working Capital = $150,000 - $180,000 = -$30,000

In cashflow analysis, an increase in working capital is treated as a cash outflow so the change is negative if working capital is growing. That means you have $30,000 more in liquidity to meet your short-term financial obligations.

What causes an increase in working capital?

Working capital doesn't change automatically. If it rose, something in your business behaviour or operating cycle made that happen.

Here's what can cause an increase in working capital.

You stocked up on inventory

Buying more inventory increases your current assets. Maybe you're preparing for a seasonal rush or maybe sales slowed down and products are sitting longer than planned. Either way, your cash is now sitting on a shelf.

Customers are paying more slowly

If accounts receivable is up, that means more unpaid invoices. You made the sale, but the cash hasn't arrived yet. This might be due to more generous payment terms, slower collections or higher sales volume on credit. Whatever the reason is, your working capital rises because you have more short-term assets on the books, even if they're not yet liquid.

You paid your bills early

Paying off short-term liabilities such as accounts payable and tax obligations, reduces your current liabilities. That increases your NWC. While this might improve vendor relationships or help you take advantage of discounts, the trade-off is less cash on hand.

You brought in short-term cash

This could be from a tax refund, an equity injection or a short-term loan. If the cash lands in your accounts and hasn't been spent yet, your current assets rise and so does your working capital.

You're growing

Fast-growing businesses often need more working capital to maintain operations. Higher sales usually mean more receivables, more inventory and sometimes longer payment cycles with customers. That demand on working capital isn't a bad sign, but it's one you need to plan for. Growth typically consumes cash before it generates it.

Working capital rises when you either add more short-term assets or decrease short-term liabilities. Sometimes that's intentional (e.g. preparing for a sales push), but sometimes it's not (e.g. unpaid invoices stacking up). If you want to know whether an increase in working capital is healthy or not, you need to know what changed in your business.

Is an increase in working capital good or bad?

The answer depends on why working capital is increasing and what part of your working capital is changing. You can't learn a lot from the number without looking at the underlying context.

This is when an increase is good:

• You have more liquidity: Maybe you have many receivables. Maybe sales picked up and customers paid on time. Maybe you're sitting on more cash than you were last quarter. That gives you breathing room to make payroll, restock inventory or invest in your business without borrowing.
  
• You're planning ahead: A working capital bump can be intentional, such as when you're building up inventory before a sales surge or setting aside cash for an upcoming expense. As long as you have a realistic plan and the money has a specific job, this kind of increase is a major move.
  
• You're reducing short-term risk: If you paid off some debt and still have cash left over, you've lowered your obligations while staying liquid.
  

This is when an increase is bad:

• Cash is stuck: If your receivables rise because customers are paying late (or not at all), your working capital might look healthier than it really is. The same goes for inventory that isn't selling. You have more assets, but not the kind you can spend.
  
• You're scaling inefficiently: Fast growth can inflate working capital needs. More sales mean more inventory, more receivables and more pressure on your systems. Without the right planning, your business can start going through cash faster than you earn it.
  
• It's a mismatch: Some businesses, such as restaurants, e-commerce and SaaS, can run lean with low working capital because they collect cash fast and pay vendors later. In those models, a rising working capital number might point to inefficiencies, not strength.
  

The only way to tell whether an increase is good or bad is to look at what changed and why and ask whether that change supports your business or slows it down.

How can you improve working capital efficiency?

Working capital efficiency is about keeping cash moving through your business without getting stuck. You're converting inputs into outputs and outputs into cash, without letting money pool in the wrong places. Here's what that looks like in practice.

Speed up collections

If you're waiting too long to get paid, that cash is sitting on the sidelines. Tighten your payment terms where you can, incentivise early payments with small discounts and use invoicing software that sends reminders automatically.

Even small changes, such as sending invoices faster and accepting more payment methods, can shorten your cash cycle.

Hold on to your cash longer

Unless there's a discount or a relationship benefit, don't pay a bill before it's due. Time payments so they align with cash inflows and renegotiate terms if you've earned trust with your vendors. The longer your cash stays in your account, the more control you have over how it's used.

Watch your inventory

Inventory is cash in disguise. The more you hold, the more capital it locks up. Use better forecasting to avoid overstocking, break up large orders if your suppliers allow you to and move old or slow-moving stock out by discounting it, bundling it or donating it.

Trim waste

Bloated operations can leak working capital. Audit recurring expenses and eliminate what you don't need, rebid vendor contracts that have gone stale and automate what's repetitive, especially in finance and ops.

Time large expenses strategically

Don't front-load a purchase if you don't have to. Lease rather than buy, if that keeps your monthly outflow lighter. Break up big investments to match when the revenue comes in and shift spend to low-revenue months only if you can afford to. The goal is to align the outlay with the benefit.

Tighten the cycle

Can you shorten the gap between paying and getting paid? Faster fulfilment policy means quicker invoicing, smaller batch sizes mean tighter inventory control and integrated systems mean fewer delays and manual errors. Time is the hidden variable in working capital and it's one of the easiest to overlook.

Plan for the crunch

Don't wait for a shortfall to scramble for solutions. Build a forecast that maps when cash comes in and when it leaves. Spot seasonal dips or big expenses early and prepare financing in advance. The worst time to look for working capital is when you need it the most.

Use short-term funding smartly

Sometimes you need cash to get through a difficult stretch or take advantage of an opportunity. That's what short-term financing is for. Use it to cover gaps in your working capital cycle and pick options with flexible repayment tied to your revenue cycle. Look at total cost and cash impact, not just monthly payments. When done right, short-term funding buys you time to make a longer-term return.

How Stripe Capital can help

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

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.
  
• Select the right amount: Get the amount that's right for your business. Customise the amount of your offer up to the maximum offer amount. The offer terms adjust based on the amount you choose.
  
• 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' 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.