Working capital is the cash a business has available to cover operational costs until the next payment. Business owners might overlook working capital until it directly impacts their operations. In fact, a 2024 survey identified $1.76 trillion USD in untapped working capital opportunity in the US. This shows how important it is for businesses to improve working capital management and drive growth.

Below, we discuss what working capital is, how it functions, and how to calculate it correctly for your business.

What’s in this article?

• What is working capital, and what does it really measure?
  
• How does working capital function inside a business?
  
• Why does working capital matter more than profitability in some cases?
  
• How do you calculate working capital correctly?
  

What is working capital, and what does it really measure?

Working capital is the difference between your current assets (e.g., cash, inventory, accounts receivable) and your current liabilities (e.g., unpaid bills, short-term loans, accounts payable). Here are some examples:

• If your current assets outweigh your current liabilities, you have positive working capital.
  
• If your current liabilities outweigh your current assets, your business might struggle to pay near-term bills.
  

A business can seem profitable but have limited working capital if its assets are invested in unsold inventory or overdue invoices. Your business’s amount of working capital is important because it reveals the flexibility your business has to operate, invest, or respond to the unexpected. Here are the parameters considered in generating working capital:

• Liquidity: This is how easily your business can meet its short-term financial obligations without struggling.
  
• Day-to-day efficiency: This tells you how your business turns inputs (e.g., inventory, labor, and services) into cash-generating outputs and how much delay or conflict exists in that process.
  
• Timing mismatches: If you consistently collect revenue after you’ve already paid for expenses, your working capital will reflect that delay.
  

How does working capital function inside a business?

Working capital funds the gap between paying and getting paid. The amount can fluctuate over time, and how you manage it impacts your business’s flexibility and resilience.

At any moment, your working capital can be invested in the following:

• Cash: This is the most liquid asset. It’s what you use daily to fund payroll, pay vendors, and settle bills.
  
• Accounts receivable: When you invoice customers, you expect a future inflow of cash. However, your capital doesn’t increase until you receive the money.
  
• Inventory: You’ve already paid for these assets. Every unsold product represents cash that isn’t circulating.
  
• Accounts payable: This is the other side of the components above. Accounts payable are your outstanding bills—the amounts you owe suppliers or service providers. Longer payment terms allow you to keep cash available.
  

These four components—cash, receivables, inventory, and payables—are in constant motion. Here are some examples of what you might do with each:

• Use cash to buy raw materials.
  
• Convert materials into products or services.
  
• Make a sale but on net 30 terms.
  
• Wait for the invoice to be paid.
  

This is the working capital cycle. The goal is to keep capital moving so your cash avoids delays. For example, timing mismatches—which can include slow-selling inventory, late-paying customers, or bills due before you receive the cash—often slow the cycle and reduce liquidity. A growing, profitable business can still be low in funds if too much capital is tied up in inventory or receivables.

Working capital management involves adjusting the cycle so you send out money and it returns quickly, without issues. Lean but firm operations can provide flexibility that allows you to wait, hire, buy, or invest without waiting for customers to pay.

Here are some ways you can support effective working capital management:

• Negotiate longer payment terms with suppliers.
  
• Collect payments faster with automated reminders or early payment incentives.
  
• Improve inventory turnover for more accurate forecasting and less overordering.
  
• Monitor the ratios (e.g., how long money sits in inventory or receivables before converting back to cash).
  

Why does working capital matter more than profitability in some cases?

Profitability tells you if your business model works. Working capital tells you if your business can continue to operate. These two qualities don’t always align. For example, your business can seem profitable but have insufficient cash when money is invested in slow-moving inventory, unpaid invoices, or up-front costs that don’t quickly return profit. Thus, working capital often matters more in the short term because it reflects how much you can actually spend.

Here are a few scenarios where working capital matters more than profit:

High-growth companies with delayed cash inflow

In this scenario, your business is selling more, and margins look great. However, you’re not getting paid fast enough. If you have to buy inventory and hire staff before customers settle their invoices, you’re spending cash faster than it’s coming in. Profit won’t cover payroll if the money isn’t in your account yet.

Seasonal businesses with uneven revenue

Your business’s income peaks during one quarter and falls during the rest, but you still have to cover year-round costs. Even if the business ends the year profitable, you might use up your working capital trying to pay for off-season expenses.

Startups that invest heavily in growth

Plenty of startups are intentionally unprofitable in early stages. Working capital—usually from investors or short-term financing—keeps them solvent. Technically, these businesses can lose money for a while, as long as they’ve got the liquidity to keep building.

Businesses with supply chain delays or sudden expenses

Unexpected problems—such as delayed shipments, late-paying clients, and equipment breakage—can affect businesses. If you don’t have enough working capital, these events can become major issues.

Working capital gives you options. It lets you wait, adjust, or take risks. Without it, you’re forced into short-term decisions, such as discounting to get paid faster, reducing hiring, or deferring important investments.

Tools such as Stripe Capital exist to fill liquidity gaps when revenue and expenses don’t align. Businesses can access flexible funding tied to their sales volumes and maintain cash flow without taking on unnecessary long-term debt.

How do you calculate working capital correctly?

This is the formula for calculating working capital:

Working Capital = Current Assets – Current Liabilities

Here’s what each of these terms includes:

Current assets

These are resources you expect to convert into cash within the next 12 months. Here are some assets that fall into this category:

• Cash and cash equivalents
  
• Accounts receivable (i.e., unpaid invoices)
  
• Inventory you plan to sell
  
• Short-term investments or prepaid expenses (e.g., insurance, software fees)
  

Consider carefully what should be included in this total. Obsolete or slow-moving inventory might not be as current as it looks. In addition, customers who routinely pay late could impact the timeline of your receivables. If you won’t actually receive cash from a resource within the next 12 months, don’t list it as a current asset.

Current liabilities

These are obligations due in the next 12 months. Here are some liabilities that fit into this category:

• Accounts payable (i.e., your unpaid bills)
  
• Accrued expenses (i.e., wages earned but not yet paid, taxes due)
  
• Short-term loans or credit lines
  
• The current portion of any long-term debt
  

You should also consider what must be included in this total to accurately represent liquidity. Business owners who forget to include upcoming debt payments or tax liabilities will make their positions look stronger than they are.

Sample calculation

If you have $500,000 in current assets and $350,000 in current liabilities, your working capital is $150,000. That’s the amount left after you cover near-term obligations.

Working capital changes daily as you collect payments, restock inventory, or pay bills. Therefore, many businesses track it constantly. Stripe users, for example, can see real-time cash flow insights in the Stripe Dashboard. This includes incoming revenue, upcoming payouts, and the amount of available cash after liabilities. The Dashboard gives you a live view of your working capital.

Strong working capital lets you make decisions from a stable position. In business, having that kind of visibility and flexibility can be valuable.